Airboss of America Corp (TSE:BOS) Delivered A Better ROE Than The Industry, Here’s Why
Airboss of America Corp (TSX:BOS) outperformed the Commodity Chemicals industry on the basis of its ROE – producing a higher 9.18% relative to the peer average of 6.81% over the past 12 months. While the impressive ratio tells us that BOS has made significant profits from little equity capital, ROE doesn’t tell us if BOS has borrowed debt to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether BOS’s ROE is actually sustainable. Check out our latest analysis for Airboss of America
Breaking down Return on Equity
Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. An ROE of 9.18% implies CA$0.09 returned on every CA$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 Airboss of America’s equity capital deployed. Its cost of equity is 9.41%. Since Airboss of America’s return does not cover its cost, with a difference of -0.0023%, this means its current use of equity is not efficient and not sustainable. Very simply, Airboss of America 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
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 Airboss of America’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 Airboss of America’s debt-to-equity level. The debt-to-equity ratio currently stands at a sensible 61.56%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Airboss of America exhibits a strong ROE against its peers, however it was not high enough to cover its own cost of equity this year. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of industry-beating returns. Although ROE can be a useful metric, it is only a small part of diligent research.
For Airboss of America, I’ve put together three relevant factors you should look at:
1. 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.
2. Valuation: What is Airboss of America 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 Airboss of America is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Airboss of America? 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.
