Yahoo Finance Is 3P Learning Limited’s (ASX:3PL) ROE Of 16.17% Sustainable?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between 3P Learning Limited (ASX:3PL)’s return fundamentals and stock market performance.
With an ROE of 16.17%, 3P Learning Limited (ASX:3PL) outpaced its own industry which delivered a less exciting 15.25% over the past year. On the surface, this looks fantastic since we know that 3PL has made large profits from little equity capital; however, ROE doesn’t tell us if management have borrowed heavily to make this happen. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of 3PL’s ROE. View out our latest analysis for 3P Learning
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of 3P Learning’s profit relative to its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. 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
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 3P Learning, which is 8.55%. Since 3P Learning’s return covers its cost in excess of 7.62%, its use of equity capital is efficient and likely to be sustainable. Simply put, 3P Learning pays less for its capital than what it generates in return. ROE can be split up into three useful 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 shows how much revenue 3P Learning can generate with its current asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since financial leverage can artificially inflate ROE, we need to look at how much debt 3P Learning currently has. The debt-to-equity ratio currently stands at a sensible 51.52%, 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. 3P Learning’s ROE is impressive relative to the industry average and also covers its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. Although ROE can be a useful metric, it is only a small part of diligent research.
For 3P Learning, I’ve put together three essential 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 3P Learning 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 3P Learning is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of 3P Learning? 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.
