Is Bluegreen Vacations Corporation’s (NYSE:BXG) 31.0% ROE Strong Compared To Its Industry?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between company’s fundamentals and stock market performance.
Bluegreen Vacations Corporation (NYSE:BXG) delivered an ROE of 31.0% over the past 12 months, which is an impressive feat relative to its industry average of 16.0% during the same period. Superficially, this looks great since we know that BXG has generated big profits with little equity capital; however, ROE doesn’t tell us how much BXG has borrowed in debt. We’ll take a closer look today at factors like financial leverage to determine whether BXG’s ROE is actually sustainable.
Check out our latest analysis for Bluegreen Vacations
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) is a measure of Bluegreen Vacations’s profit relative to its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.31 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 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 Bluegreen Vacations, which is 11.4%. Given a positive discrepancy of 19.6% between return and cost, this indicates that Bluegreen Vacations pays less for its capital than what it generates in return, which is a sign of capital efficiency. 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
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 Bluegreen Vacations can make from its asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. Since financial leverage can artificially inflate ROE, we need to look at how much debt Bluegreen Vacations currently has. The debt-to-equity ratio currently stands at a balanced 139%, 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. Bluegreen Vacations exhibits a strong ROE against its peers, as well as sufficient returns to cover its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. Although ROE can be a useful metric, it is only a small part of diligent research.
For Bluegreen Vacations, there are three essential factors you should further research:
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 Bluegreen Vacations 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 Bluegreen Vacations is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Bluegreen Vacations? 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
