Yahoo Finance Can Geo Energy Resources Limited (SGX:RE4) Continue To Outperform Its Industry?
I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in Geo Energy Resources Limited (SGX:RE4).
Geo Energy Resources Limited (SGX:RE4) outperformed the Coal and Consumable Fuels industry on the basis of its ROE – producing a higher 18.99% relative to the peer average of 10.43% over the past 12 months. Superficially, this looks great since we know that RE4 has generated big profits with little equity capital; however, ROE doesn’t tell us how much RE4 has borrowed in debt. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable RE4’s ROE is. Check out our latest analysis for Geo Energy Resources
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) weighs Geo Energy Resources’s profit against the level of its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. 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 Geo Energy Resources’s equity capital deployed. Its cost of equity is 12.07%. Given a positive discrepancy of 6.91% between return and cost, this indicates that Geo Energy Resources 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
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 Geo Energy Resources 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 Geo Energy Resources currently has. The debt-to-equity ratio currently stands at a high 177.46%, meaning the above-average ratio is a result of a large amount of debt.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Geo Energy Resources’s ROE is impressive relative to the industry average and also covers its cost of equity. With debt capital in excess of equity, ROE may be inflated by the use of debt funding, raising questions over the sustainability of the company’s returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Geo Energy Resources, I’ve put together three important aspects 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 Geo Energy Resources 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 Geo Energy Resources is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Geo Energy Resources? 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.
