Yahoo Finance AG BARR plc (LON:BAG): Can It Deliver A Superior ROE To The Industry?
I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on AG BARR plc (LON:BAG) stock.
AG BARR plc (LON:BAG) generated a below-average return on equity of 18.43% in the past 12 months, while its industry returned 20.88%. An investor may attribute an inferior ROE to a relatively inefficient performance, and whilst this can often be the case, knowing the nuts and bolts of the ROE calculation may change that perspective and give you a deeper insight into BAG’s past performance. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of BAG’s returns. Let me show you what I mean by this. Check out our latest analysis for A.G. BARR
What you must know about ROE
Return on Equity (ROE) weighs A.G. BARR’s profit against the level of its shareholders’ equity. An ROE of 18.43% implies £0.18 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 measured against cost of equity in order to determine the efficiency of A.G. BARR’s equity capital deployed. Its cost of equity is 8.28%. A.G. BARR’s ROE exceeds its cost by 10.15%, which is a big tick. Some of its peers with higher ROE may face a cost which exceeds returns, which is unsustainable and far less desirable than A.G. BARR’s case of positive discrepancy. 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
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. The other component, asset turnover, illustrates how much revenue A.G. BARR 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 ROE can be artificially increased through excessive borrowing, we should check A.G. BARR’s historic debt-to-equity ratio. Currently A.G. BARR has virtually no debt, which means its returns are predominantly driven by equity capital. This could explain why A.G. BARR’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. Even though A.G. BARR 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 A.G. BARR’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 A.G. BARR, I’ve put together three essential 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 A.G. BARR 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 A.G. BARR is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of A.G. BARR? 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.
