Yahoo Finance With An ROE Of 4.68%, Has LogMeIn Inc’s (NASDAQ:LOGM) Management Done Well?
This analysis is intended to introduce important early concepts to people who are starting to invest and want a simplistic look at the return on LogMeIn Inc (NASDAQ:LOGM) stock.
LogMeIn Inc (NASDAQ:LOGM) generated a below-average return on equity of 4.68% in the past 12 months, while its industry returned 12.67%. Though LOGM’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 LOGM’s below-average returns. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of LOGM’s returns. Let me show you what I mean by this. Check out our latest analysis for LogMeIn
Peeling the layers of ROE – trisecting a company’s profitability
Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. An ROE of 4.68% implies $0.047 returned on every $1 invested. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
Returns are usually compared to costs to measure the efficiency of capital. LogMeIn’s cost of equity is 11.98%. This means LogMeIn’s returns actually do not cover its own cost of equity, with a discrepancy of -7.30%. This isn’t sustainable as it implies, very simply, that the company pays more for its capital than what it generates in return. 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
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover reveals how much revenue can be generated from LogMeIn’s 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 LogMeIn’s debt-to-equity level. Currently, LogMeIn has no debt which means its returns are driven purely by equity capital. This could explain why LogMeIn’s’ ROE is lower than its industry peers, most of which may have some degree of debt in its business.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. LogMeIn exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. Although, its appropriate level of leverage means investors can be more confident in the sustainability of LogMeIn’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 LogMeIn, I’ve compiled three fundamental factors 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 LogMeIn 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 LogMeIn is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of LogMeIn? 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.
