Yahoo Finance With An ROE Of 11.38%, Can Stockland (ASX:SGP) Catch Up To The Industry?
This analysis is intended to introduce important early concepts to people who are starting to invest and looking to gauge the potential return on investment in Stockland (ASX:SGP).
Stockland (ASX:SGP) generated a below-average return on equity of 11.38% in the past 12 months, while its industry returned 13.18%. Though SGP’s recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on SGP’s below-average returns. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of SGP’s returns. See our latest analysis for Stockland
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of Stockland’s profit relative to its shareholders’ equity. For example, if the company invests A$1 in the form of equity, it will generate A$0.11 in earnings from this. 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
Returns are usually compared to costs to measure the efficiency of capital. Stockland’s cost of equity is 8.55%. Since Stockland’s return covers its cost in excess of 2.83%, its use of equity capital is efficient and likely to be sustainable. Simply put, Stockland 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
Essentially, profit margin shows how much money the company makes after paying for all its expenses. The other component, asset turnover, illustrates how much revenue Stockland can make from its 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 financial leverage can artificially inflate ROE, we need to look at how much debt Stockland currently has. At 36.69%, Stockland’s debt-to-equity ratio appears low and indicates that Stockland still has room to increase leverage and grow its profits.
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. Even though Stockland returned below the industry average, its ROE comes in excess of its cost of equity. Its appropriate level of leverage means investors can be more confident in the sustainability of Stockland’s return with a possible increase should the company decide to increase its debt levels. Although ROE can be a useful metric, it is only a small part of diligent research.
For Stockland, there are three key factors you should look at:
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 Stockland 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 Stockland is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Stockland? 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.
