Yahoo Finance Did TBC Bank Group PLC (LON:TBCG) Create Value For Shareholders?
I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on TBC Bank Group PLC (LON:TBCG) stock.
TBC Bank Group PLC (LON:TBCG) delivered an ROE of 18.70% over the past 12 months, which is an impressive feat relative to its industry average of 7.99% during the same period. Superficially, this looks great since we know that TBCG has generated big profits with little equity capital; however, ROE doesn’t tell us how much TBCG has borrowed in debt. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable TBCG’s ROE is. View out our latest analysis for TBC Bank Group
Breaking down Return on Equity
Return on Equity (ROE) weighs TBC Bank Group’s profit against the level of its shareholders’ equity. For example, if the company invests £1 in the form of equity, it will generate £0.19 in earnings from this. 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 TBC Bank Group, which is 8.28%. Given a positive discrepancy of 10.42% between return and cost, this indicates that TBC Bank Group pays less for its capital than what it generates in return, which is a sign of capital efficiency. 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. Asset turnover shows how much revenue TBC Bank Group can generate with its current 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 TBC Bank Group’s debt-to-equity level. Currently the debt-to-equity ratio stands at a balanced 139.43%, which means its above-average ROE is driven by its ability to grow its profit without a significant debt burden.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. TBC Bank Group’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. Although ROE can be a useful metric, it is only a small part of diligent research.
For TBC Bank Group, there are three pertinent factors you should further examine:
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 TBC Bank Group 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 TBC Bank Group is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of TBC Bank Group? 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.
