Yahoo Finance How Did Ausnutria Dairy Corporation Ltd’s (HKG:1717) 26.2% ROE Fare Against 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 to start learning about core concepts of fundamental analysis on practical examples from today’s market.
With an ROE of 26.2%, Ausnutria Dairy Corporation Ltd (HKG:1717) outpaced its own industry which delivered a less exciting 9.4% over the past year. While the impressive ratio tells us that 1717 has made significant profits from little equity capital, ROE doesn’t tell us if 1717 has borrowed debt to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether 1717’s ROE is actually sustainable.
Check out our latest analysis for Ausnutria Dairy
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) weighs Ausnutria Dairy’s profit against the level of its shareholders’ equity. An ROE of 26.2% implies HK$0.26 returned on every HK$1 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 Ausnutria Dairy’s equity capital deployed. Its cost of equity is 10.4%. This means Ausnutria Dairy returns enough to cover its own cost of equity, with a buffer of 15.8%. This sustainable practice implies that the company pays less 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
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover shows how much revenue Ausnutria Dairy can generate with its current 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 Ausnutria Dairy currently has. Currently the debt-to-equity ratio stands at a balanced 111%, which means its above-average ROE is driven by its ability to grow its profit without a significant 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. Ausnutria Dairy’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 Ausnutria Dairy, I’ve compiled three important 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 Ausnutria Dairy 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 Ausnutria Dairy is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Ausnutria Dairy? 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
