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With An ROE Of 20.59%, Has Challenger Technologies Limited’s (SGX:573) Management Done Well?

I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on Challenger Technologies Limited (SGX:573) stock.

Challenger Technologies Limited (SGX:573) outperformed the Computer and Electronics Retail industry on the basis of its ROE – producing a higher 20.59% relative to the peer average of 8.04% over the past 12 months. Superficially, this looks great since we know that 573 has generated big profits with little equity capital; however, ROE doesn’t tell us how much 573 has borrowed in debt. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable 573’s ROE is. See our latest analysis for Challenger Technologies

Breaking down Return on Equity

Return on Equity (ROE) weighs Challenger Technologies’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. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making 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 Challenger Technologies, which is 8.51%. Since Challenger Technologies’s return covers its cost in excess of 12.07%, its use of equity capital is efficient and likely to be sustainable. Simply put, Challenger Technologies pays less for its capital than what it generates in return. 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

SGX:573 Last Perf June 27th 18
SGX:573 Last Perf June 27th 18

The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. The other component, asset turnover, illustrates how much revenue Challenger Technologies can make from its asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. Since financial leverage can artificially inflate ROE, we need to look at how much debt Challenger Technologies currently has. Currently, Challenger Technologies has no debt which means its returns are driven purely by equity capital. Therefore, the level of financial leverage has no impact on ROE, and the ratio is a representative measure of the efficiency of all its capital employed firm-wide.

SGX:573 Historical Debt June 27th 18
SGX:573 Historical Debt June 27th 18

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Challenger Technologies’s above-industry ROE is encouraging, and is also in excess of 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 Challenger Technologies, I’ve put together three important 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 Challenger Technologies 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 Challenger Technologies is currently mispriced by the market.

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