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Did DuluxGroup Limited (ASX:DLX) Create Value For Shareholders?

DuluxGroup Limited (ASX:DLX) outperformed the Specialty Chemicals industry on the basis of its ROE – producing a higher 34.45% relative to the peer average of 11.00% over the past 12 months. While the impressive ratio tells us that DLX has made significant profits from little equity capital, ROE doesn’t tell us if DLX has borrowed debt to make this happen. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of DLX’s ROE. See our latest analysis for DuluxGroup

Peeling the layers of ROE – trisecting a company’s profitability

Return on Equity (ROE) is a measure of DuluxGroup’s profit relative to its shareholders’ equity. An ROE of 34.45% implies A$0.34 returned on every A$1 invested. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.

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Return on Equity = Net Profit ÷ Shareholders Equity

Returns are usually compared to costs to measure the efficiency of capital. DuluxGroup’s cost of equity is 8.55%. Given a positive discrepancy of 25.89% between return and cost, this indicates that DuluxGroup pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be broken down into three different ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

ASX:DLX Last Perf Jun 7th 18
ASX:DLX Last Perf Jun 7th 18

The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover shows how much revenue DuluxGroup can generate with its current asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine DuluxGroup’s debt-to-equity level. The debt-to-equity ratio currently stands at a balanced 107.78%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.

ASX:DLX Historical Debt Jun 7th 18
ASX:DLX Historical Debt Jun 7th 18

Next Steps:

While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. DuluxGroup’s above-industry ROE is encouraging, and is also in excess of its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. Although ROE can be a useful metric, it is only a small part of diligent research.

For DuluxGroup, there are three essential factors you should look at:

  1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Valuation: What is DuluxGroup worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether DuluxGroup is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of DuluxGroup? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.