Yahoo Finance Did Hermès International Société en commandite par actions (EPA:RMS) Create Value For Shareholders?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Hermès International Société en commandite par actions (EPA:RMS).
With an ROE of 24.30%, Hermès International Société en commandite par actions (EPA:RMS) outpaced its own industry which delivered a less exciting 16.20% over the past year. Superficially, this looks great since we know that RMS has generated big profits with little equity capital; however, ROE doesn’t tell us how much RMS has borrowed in debt. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of RMS’s ROE. See our latest analysis for Hermès International Société en commandite par actions
Breaking down Return on Equity
Return on Equity (ROE) is a measure of Hermès International Société en commandite par actions’s profit relative to its shareholders’ equity. An ROE of 24.30% implies €0.24 returned on every €1 invested. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for Hermès International Société en commandite par actions, which is 8.16%. Given a positive discrepancy of 16.14% between return and cost, this indicates that Hermès International Société en commandite par actions 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
Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. The other component, asset turnover, illustrates how much revenue Hermès International Société en commandite par actions can make from its asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. Since financial leverage can artificially inflate ROE, we need to look at how much debt Hermès International Société en commandite par actions currently has. The debt-to-equity ratio currently stands at a low 1.06%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Hermès International Société en commandite par actions’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 Hermès International Société en commandite par actions, I’ve put together three key aspects you should further examine:
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.
Valuation: What is Hermès International Société en commandite par actions 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 Hermès International Société en commandite par actions is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Hermès International Société en commandite par actions? 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.
