Yahoo Finance Should You Expect Aéroports de Paris SA (EPA:ADP) To Continue Delivering An ROE Of 11.30%?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Aéroports de Paris SA (EPA:ADP)’s return fundamentals and stock market performance.
Aéroports de Paris SA (EPA:ADP) outperformed the Airport Services industry on the basis of its ROE – producing a higher 11.30% relative to the peer average of 11.22% over the past 12 months. While the impressive ratio tells us that ADP has made significant profits from little equity capital, ROE doesn’t tell us if ADP has borrowed debt to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable ADP’s ROE is. View out our latest analysis for Aéroports de Paris
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) weighs Aéroports de Paris’s profit against the level of its shareholders’ equity. For example, if the company invests €1 in the form of equity, it will generate €0.11 in earnings from this. 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 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 Aéroports de Paris, which is 8.16%. Aéroports de Paris’s ROE exceeds its cost by 3.14%, 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 Aéroports de Paris’s case of positive discrepancy. 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 shows how much revenue Aéroports de Paris 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 financial leverage can artificially inflate ROE, we need to look at how much debt Aéroports de Paris currently has. The debt-to-equity ratio currently stands at a balanced 110.18%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Aéroports de Paris’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. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Aéroports de Paris, there are three important 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 Aéroports de Paris 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 Aéroports de Paris is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Aéroports de Paris? 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.
