Comfort Systems USA Inc (NYSE:FIX) Delivered A Better ROE Than The Industry, Here’s Why
Comfort Systems USA Inc (NYSE:FIX) outperformed the Construction and Engineering industry on the basis of its ROE – producing a higher 15.02% relative to the peer average of 11.80% over the past 12 months. Superficially, this looks great since we know that FIX has generated big profits with little equity capital; however, ROE doesn’t tell us how much FIX has borrowed in debt. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of FIX’s ROE. Check out our latest analysis for Comfort Systems USA
What you must know about ROE
Return on Equity (ROE) is a measure of Comfort Systems USA’s profit relative to its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.15 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 Comfort Systems USA’s equity capital deployed. Its cost of equity is 8.49%. Given a positive discrepancy of 6.52% between return and cost, this indicates that Comfort Systems USA pays less for its capital than what it generates in return, which is a sign of capital efficiency. 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. Asset turnover shows how much revenue Comfort Systems USA can generate with its current 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 Comfort Systems USA’s historic debt-to-equity ratio. At 15.38%, Comfort Systems USA’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.
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. Comfort Systems USA’s ROE is impressive relative to the industry average and also covers 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 Comfort Systems USA, I’ve put together three essential 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.
Valuation: What is Comfort Systems USA 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 Comfort Systems USA is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Comfort Systems USA? 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.
