Yahoo Finance How ComfortDelGro Corporation Limited (SGX:C52) Delivered A Better ROE Than Its 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 ComfortDelGro Corporation Limited (SGX:C52) stock.
With an ROE of 10.72%, ComfortDelGro Corporation Limited (SGX:C52) outpaced its own industry which delivered a less exciting 11.22% over the past year. While the impressive ratio tells us that C52 has made significant profits from little equity capital, ROE doesn’t tell us if C52 has borrowed debt to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether C52’s ROE is actually sustainable. See our latest analysis for ComfortDelGro
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) is a measure of ComfortDelGro’s profit relative to its shareholders’ equity. An ROE of 10.72% implies SGD0.11 returned on every SGD1 invested. 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 ComfortDelGro’s equity capital deployed. Its cost of equity is 8.51%. Since ComfortDelGro’s return covers its cost in excess of 2.21%, its use of equity capital is efficient and likely to be sustainable. Simply put, ComfortDelGro pays less 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
Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. Asset turnover reveals how much revenue can be generated from ComfortDelGro’s 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 ComfortDelGro’s historic debt-to-equity ratio. Currently the debt-to-equity ratio stands at a low 10.87%, which means ComfortDelGro still has headroom to take on more leverage in order to increase profits.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. ComfortDelGro’s ROE is impressive relative to the industry average and also covers 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 ComfortDelGro, there are three relevant aspects 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 ComfortDelGro 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 ComfortDelGro is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of ComfortDelGro? 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.
