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Can Bank Zachodni WBK SA. (WSE:BZW) Continue To Outperform Its Industry?

Bank Zachodni WBK SA. (WSE:BZW) delivered an ROE of 10.62% over the past 12 months, which is an impressive feat relative to its industry average of 8.58% during the same period. While the impressive ratio tells us that BZW has made significant profits from little equity capital, ROE doesn’t tell us if BZW has borrowed debt to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether BZW’s ROE is actually sustainable. See our latest analysis for Bank Zachodni WBK

What you must know about ROE

Return on Equity (ROE) weighs Bank Zachodni WBK’s profit against the level of its shareholders’ equity. For example, if the company invests PLN1 in the form of equity, it will generate PLN0.11 in earnings from this. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.

Return on Equity = Net Profit ÷ Shareholders Equity

ROE is measured against cost of equity in order to determine the efficiency of Bank Zachodni WBK’s equity capital deployed. Its cost of equity is 10.61%. Given a positive discrepancy of 0.011% between return and cost, this indicates that Bank Zachodni WBK pays less for its capital than what it generates in return, which is a sign of capital efficiency. 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

WSE:BZW Last Perf May 25th 18
WSE:BZW Last Perf May 25th 18

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 Bank Zachodni WBK’s 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 Bank Zachodni WBK’s historic debt-to-equity ratio. The debt-to-equity ratio currently stands at a sensible 80.99%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.

WSE:BZW Historical Debt May 25th 18
WSE:BZW Historical Debt May 25th 18

Next Steps:

ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Bank Zachodni WBK’s above-industry ROE is encouraging, and is also in excess of its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. Although ROE can be a useful metric, it is only a small part of diligent research.

For Bank Zachodni WBK, I’ve compiled three important aspects you should further research:

  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 Bank Zachodni WBK 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 Bank Zachodni WBK is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Bank Zachodni WBK? 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.

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