What is Behind Mapletree Industrial Trust’s (SGX:ME8U) Superior ROE?
Mapletree Industrial Trust (SGX:ME8U) delivered an ROE of 10.60% over the past 12 months, which is an impressive feat relative to its industry average of 6.90% during the same period. Superficially, this looks great since we know that ME8U has generated big profits with little equity capital; however, ROE doesn’t tell us how much ME8U has borrowed in debt. We’ll take a closer look today at factors like financial leverage to determine whether ME8U’s ROE is actually sustainable. See our latest analysis for Mapletree Industrial Trust
Breaking down Return on Equity
Return on Equity (ROE) is a measure of Mapletree Industrial Trust’s profit relative to its shareholders’ equity. For example, if the company invests SGD1 in the form of equity, it will generate SGD0.11 in earnings from this. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of Mapletree Industrial Trust’s equity capital deployed. Its cost of equity is 8.38%. This means Mapletree Industrial Trust returns enough to cover its own cost of equity, with a buffer of 2.22%. This sustainable practice implies that the company pays less 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
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. The other component, asset turnover, illustrates how much revenue Mapletree Industrial Trust can make from its 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 financial leverage can artificially inflate ROE, we need to look at how much debt Mapletree Industrial Trust currently has. Currently the debt-to-equity ratio stands at a reasonable 54.41%, 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. Mapletree Industrial Trust’s ROE is impressive relative to the industry average and also covers 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 Mapletree Industrial Trust, I’ve put together three important aspects 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 Mapletree Industrial Trust 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 Mapletree Industrial Trust is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Mapletree Industrial Trust? 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.
