Yahoo Finance Euronet Worldwide Inc (NASDAQ:EEFT): Can It Deliver A Superior ROE To The Industry?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Euronet Worldwide Inc (NASDAQ:EEFT)’s return fundamentals and stock market performance.
Euronet Worldwide Inc (NASDAQ:EEFT) generated a below-average return on equity of 13.75% in the past 12 months, while its industry returned 15.08%. An investor may attribute an inferior ROE to a relatively inefficient performance, and whilst this can often be the case, knowing the nuts and bolts of the ROE calculation may change that perspective and give you a deeper insight into EEFT’s past performance. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of EEFT’s returns. View out our latest analysis for Euronet Worldwide
What you must know about ROE
Return on Equity (ROE) is a measure of Euronet Worldwide’s profit relative to its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.14 in earnings from this. 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 Euronet Worldwide’s equity capital deployed. Its cost of equity is 10.02%. Euronet Worldwide’s ROE exceeds its cost by 3.73%, which is a big tick. Some of its peers with higher ROE may face a cost which exceeds returns, which is unsustainable and far less desirable than Euronet Worldwide’s case of positive discrepancy. 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
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover shows how much revenue Euronet Worldwide can generate with its current 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 ROE can be artificially increased through excessive borrowing, we should check Euronet Worldwide’s historic debt-to-equity ratio. At 56.28%, Euronet Worldwide’s debt-to-equity ratio appears sensible and indicates its ROE is generated from its capacity to increase profit without a large debt burden.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Even though Euronet Worldwide returned below the industry average, its ROE comes in excess of its cost of equity. Also, 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 Euronet Worldwide, there are three relevant factors you should further examine:
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 Euronet Worldwide 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 Euronet Worldwide is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Euronet Worldwide? 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.
