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What is Behind Pingtan Marine Enterprise Ltd’s (PME) Superior ROE?

Pingtan Marine Enterprise Ltd (NASDAQ:PME) outperformed the Packaged Foods and Meats industry on the basis of its ROE – producing a higher 26.29% relative to the peer average of 11.32% over the past 12 months. Superficially, this looks great since we know that PME has generated big profits with little equity capital; however, ROE doesn’t tell us how much PME has borrowed in debt. We’ll take a closer look today at factors like financial leverage to determine whether PME’s ROE is actually sustainable. View our latest analysis for Pingtan Marine Enterprise

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. It essentially shows how much PME can generate in earnings given the amount of equity it has raised. 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 assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for PME, which is 8.49%. This means PME returns enough to cover its own cost of equity, with a buffer of 17.80%. This sustainable practice implies that the company pays less for its capital than what it generates in return. 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

NasdaqCM:PME Last Perf Nov 23rd 17
NasdaqCM:PME Last Perf Nov 23rd 17

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 PME can make from its asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable PME’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine PME’s debt-to-equity level. Currently the debt-to-equity ratio stands at a low 34.63%, which means its above-average ROE is driven by its ability to grow its profit without a significant debt burden.

NasdaqCM:PME Historical Debt Nov 23rd 17
NasdaqCM:PME Historical Debt Nov 23rd 17

What this means for you:

Are you a shareholder? PME exhibits a strong ROE against its peers, as well as sufficient returns to cover its cost of equity. Since ROE is not inflated by excessive debt, it might be a good time to add more of PME to your portfolio if your personal research is confirming what the ROE is telling you. If you’re looking for new ideas for high-returning stocks, you should take a look at our free platform to see the list of stocks with Return on Equity over 20%.

Are you a potential investor? If you are considering investing in PME, looking at ROE on its own is not enough to make a well-informed decision. I recommend you do additional fundamental analysis by looking through our most recent infographic report on Pingtan Marine Enterprise to help you make a more informed investment decision.


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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