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Community West Bancshares (NASDAQ:CWBC): Can It Deliver A Superior ROE To The Industry?

Sam Bishop

Community West Bancshares (NASDAQ:CWBC) delivered a less impressive 7.26% ROE over the past year, compared to the 8.62% return generated by its industry. An investor may attribute an inferior ROE to a relatively inefficient performance, and whilst this can often be the case, knowing the nuts and bolts of the ROE calculation may change that perspective and give you a deeper insight into CWBC’s past performance. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of CWBC’s returns. View our latest analysis for Community West Bancshares

Breaking down Return on Equity

Return on Equity (ROE) weighs Community West Bancshares’s profit against the level of its shareholders’ equity. It essentially shows how much the company 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

Returns are usually compared to costs to measure the efficiency of capital. Community West Bancshares’s cost of equity is 9.73%. This means Community West Bancshares’s returns actually do not cover its own cost of equity, with a discrepancy of -2.47%. This isn’t sustainable as it implies, very simply, that the company pays more 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

NasdaqGM:CWBC Last Perf Feb 4th 18

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. Asset turnover shows how much revenue Community West Bancshares 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 Community West Bancshares’s historic debt-to-equity ratio. The debt-to-equity ratio currently stands at a sensible 81.12%, meaning the ROE is a result of its capacity to produce profit growth without a huge debt burden.

NasdaqGM:CWBC Historical Debt Feb 4th 18

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Community West Bancshares’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. However, ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of returns, which has headroom to increase further. Although ROE can be a useful metric, it is only a small part of diligent research.

For Community West Bancshares, I’ve compiled three essential factors you should further examine:


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.