Yahoo Finance Why Second Chance Properties Ltd (SGX:528) May Not Be As Efficient As Its Industry
I am writing today to help inform people who are new to the stock market and want to begin learning the link between Second Chance Properties Ltd (SGX:528)’s return fundamentals and stock market performance.
Second Chance Properties Ltd’s (SGX:528) most recent return on equity was a substandard 4.00% relative to its industry performance of 8.04% over the past year. Though 528’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 528’s below-average returns. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of 528’s returns. Let me show you what I mean by this. See our latest analysis for Second Chance Properties
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of Second Chance Properties’s profit relative to its shareholders’ equity. An ROE of 4.00% implies SGD0.040 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 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 Second Chance Properties, which is 8.51%. This means Second Chance Properties’s returns actually do not cover its own cost of equity, with a discrepancy of -4.51%. This isn’t sustainable as it implies, very simply, that the company 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 Second Chance Properties’s asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be inflated by excessive debt, we need to examine Second Chance Properties’s debt-to-equity level. Currently the debt-to-equity ratio stands at a low 18.12%, which means Second Chance Properties still has headroom to take on more leverage in order to increase profits.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Second Chance Properties’s below-industry ROE is disappointing, furthermore, its returns were not even high enough to cover its own cost of equity. However, 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. Although ROE can be a useful metric, it is only a small part of diligent research.
For Second Chance Properties, I’ve compiled three key factors you should look at:
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 Second Chance Properties 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 Second Chance Properties is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Second Chance Properties? 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.
