Yahoo Finance With An ROE Of 9.81%, Can ALJ Regional Holdings Inc (NASDAQ:ALJJ) Catch Up To The Industry?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between ALJ Regional Holdings Inc (NASDAQ:ALJJ)’s return fundamentals and stock market performance.
ALJ Regional Holdings Inc (NASDAQ:ALJJ) generated a below-average return on equity of 9.81% in the past 12 months, while its industry returned 15.08%. Though ALJJ’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 ALJJ’s below-average returns. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of ALJJ’s returns. View out our latest analysis for ALJ Regional Holdings
What you must know about ROE
Return on Equity (ROE) is a measure of ALJ Regional Holdings’s profit relative to its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of ALJ Regional Holdings’s equity capital deployed. Its cost of equity is 16.61%. Since ALJ Regional Holdings’s return does not cover its cost, with a difference of -6.80%, this means its current use of equity is not efficient and not sustainable. Very simply, ALJ Regional Holdings pays more for its capital than what it generates in return. 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. The other component, asset turnover, illustrates how much revenue ALJ Regional Holdings 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 financial leverage can artificially inflate ROE, we need to look at how much debt ALJ Regional Holdings currently has. At 108.93%, ALJ Regional Holdings’s debt-to-equity ratio appears balanced and indicates its ROE is generated from its capacity to increase profit without a large debt burden.
Next Steps:
While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. ALJ Regional Holdings exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. Although, its appropriate level of leverage means investors can be more confident in the sustainability of ALJ Regional Holdings’s return with a possible increase should the company decide to increase its debt levels. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For ALJ Regional Holdings, I’ve compiled three key aspects you should further research:
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 ALJ Regional Holdings 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 ALJ Regional Holdings is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of ALJ Regional Holdings? 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.
