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MYR Group Inc (NASDAQ:MYRG): Can It Deliver A Superior ROE To The Industry?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want a simplistic look at the return on MYR Group Inc (NASDAQ:MYRG) stock.

MYR Group Inc’s (NASDAQ:MYRG) most recent return on equity was a substandard 8.72% relative to its industry performance of 12.14% over the past year. Though MYRG’s recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on MYRG’s below-average returns. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of MYRG’s returns. Let me show you what I mean by this. See our latest analysis for MYR Group

Peeling the layers of ROE – trisecting a company’s profitability

Return on Equity (ROE) is a measure of MYR Group’s profit relative to its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.087 in earnings from this. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.

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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 MYR Group, which is 8.59%. Some of MYR Group’s peers may have a higher ROE but its cost of equity could exceed this return, leading to an unsustainable negative discrepancy i.e. the company spends more than it earns. This is not the case for MYR Group which is reassuring. 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

NasdaqGS:MYRG Last Perf June 22nd 18
NasdaqGS:MYRG Last Perf June 22nd 18

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. The other component, asset turnover, illustrates how much revenue MYR Group can make from its 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 artificially increased through excessive borrowing, we should check MYR Group’s historic debt-to-equity ratio. At 24.14%, MYR Group’s debt-to-equity ratio appears low and indicates that MYR Group still has room to increase leverage and grow its profits.

NasdaqGS:MYRG Historical Debt June 22nd 18
NasdaqGS:MYRG Historical Debt June 22nd 18

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Even though MYR Group returned below the industry average, its ROE comes in excess of its cost of equity. Also, ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of returns, which has headroom to increase further. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.

For MYR Group, I’ve compiled three key aspects you should look at:

  1. 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.

  2. Valuation: What is MYR 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 MYR Group is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of MYR 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.