Yahoo Finance Can Reef Casino Trust (ASX:RCT) Continue To Outperform Its Industry?
This article is intended for those of you who are at the beginning of your investing journey and want a simplistic look at the return on Reef Casino Trust (ASX:RCT) stock.
With an ROE of 43.24%, Reef Casino Trust (ASX:RCT) outpaced its own industry which delivered a less exciting 15.20% over the past year. While the impressive ratio tells us that RCT has made significant profits from little equity capital, ROE doesn’t tell us if RCT has borrowed debt to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable RCT’s ROE is. See our latest analysis for Reef Casino Trust
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) weighs Reef Casino Trust’s profit against the level of its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of Reef Casino Trust’s equity capital deployed. Its cost of equity is 8.55%. This means Reef Casino Trust returns enough to cover its own cost of equity, with a buffer of 34.68%. This sustainable practice implies that the company pays less for its capital than what it generates in return. ROE can be dissected into three distinct 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 Reef Casino Trust can make from its asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be artificially increased through excessive borrowing, we should check Reef Casino Trust’s historic debt-to-equity ratio. The debt-to-equity ratio currently stands at a low 24.53%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Reef Casino Trust’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. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Reef Casino Trust, I’ve put together three pertinent aspects you should further research:
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 Reef Casino Trust 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 Reef Casino Trust is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Reef Casino Trust? 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.
