Yahoo Finance With An ROE Of 10.11%, Has Frasers Hospitality Trust’s (SGX:ACV) Management Done Well?
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 Frasers Hospitality Trust (SGX:ACV).
Frasers Hospitality Trust (SGX:ACV) delivered an ROE of 10.11% over the past 12 months, which is an impressive feat relative to its industry average of 7.25% during the same period. While the impressive ratio tells us that ACV has made significant profits from little equity capital, ROE doesn’t tell us if ACV has borrowed debt to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable ACV’s ROE is. See our latest analysis for Frasers Hospitality Trust
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) weighs Frasers Hospitality Trust’s profit against the level of its shareholders’ equity. An ROE of 10.11% implies SGD0.10 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 Frasers Hospitality Trust’s equity capital deployed. Its cost of equity is 8.51%. Given a positive discrepancy of 1.60% between return and cost, this indicates that Frasers Hospitality Trust pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be split up into three useful 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
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover shows how much revenue Frasers Hospitality Trust can generate with its current 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 Frasers Hospitality Trust’s historic debt-to-equity ratio. The debt-to-equity ratio currently stands at a sensible 52.99%, 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. Frasers Hospitality Trust’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 Frasers Hospitality Trust, there are three essential 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 Frasers Hospitality Trust 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 Frasers Hospitality Trust is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Frasers Hospitality Trust? 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.
