Noble Midstream Partners LP (NYSE:NBLX) outperformed the Oil and Gas Storage and Transportation industry on the basis of its ROE – producing a higher 26.55% relative to the peer average of 10.63% over the past 12 months. While the impressive ratio tells us that NBLX has made significant profits from little equity capital, ROE doesn’t tell us if NBLX has borrowed debt to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether NBLX’s ROE is actually sustainable. Check out our latest analysis for Noble Midstream Partners
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of Noble Midstream Partners’s profit relative to its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.27 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
Returns are usually compared to costs to measure the efficiency of capital. Noble Midstream Partners’s cost of equity is 8.66%. Since Noble Midstream Partners’s return covers its cost in excess of 17.89%, its use of equity capital is efficient and likely to be sustainable. Simply put, Noble Midstream Partners 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:
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 reveals how much revenue can be generated from Noble Midstream Partners’s asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be artificially increased through excessive borrowing, we should check Noble Midstream Partners’s historic debt-to-equity ratio. At 14.30%, Noble Midstream Partners’s debt-to-equity ratio appears low and indicates the above-average ROE is generated from its capacity to increase profit without a large debt burden.
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. Noble Midstream Partners’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 Noble Midstream Partners, I’ve put together three important aspects you should look at:
- 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.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Noble Midstream Partners’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Noble Midstream Partners? 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.