Yahoo Finance Why Roxy-Pacific Holdings Limited (SGX:E8Z) Delivered An Inferior ROE Compared 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 Roxy-Pacific Holdings Limited (SGX:E8Z) stock.
Roxy-Pacific Holdings Limited’s (SGX:E8Z) most recent return on equity was a substandard 6.32% relative to its industry performance of 6.62% over the past year. Though E8Z’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 E8Z’s below-average returns. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of E8Z’s returns. Check out our latest analysis for Roxy-Pacific Holdings
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of Roxy-Pacific 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. 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
Returns are usually compared to costs to measure the efficiency of capital. Roxy-Pacific Holdings’s cost of equity is 9.88%. Since Roxy-Pacific Holdings’s return does not cover its cost, with a difference of -3.57%, this means its current use of equity is not efficient and not sustainable. Very simply, Roxy-Pacific Holdings pays more for its capital than what it generates in return. ROE can be broken down into three different 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 reveals how much revenue can be generated from Roxy-Pacific Holdings’s 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 Roxy-Pacific Holdings’s historic debt-to-equity ratio. Currently the debt-to-equity ratio stands at a high 179.62%, which means its below-average ROE is already being driven by significant debt levels.
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. Roxy-Pacific Holdings’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. Although, its appropriate level of leverage means investors can be more confident in the sustainability of Roxy-Pacific 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 Roxy-Pacific Holdings, I’ve compiled three pertinent factors 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.
Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Roxy-Pacific Holdings’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Roxy-Pacific 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.
