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How Did AMREP Corporation’s (NYSE:AXR) 1.12% ROE Fare Against The Industry?

Felix Olson

AMREP Corporation (NYSE:AXR) generated a below-average return on equity of 1.12% in the past 12 months, while its industry returned 12.05%. Though AXR’s recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on AXR’s below-average returns. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of AXR’s returns. Let me show you what I mean by this. See our latest analysis for AMREP

Peeling the layers of ROE – trisecting a company’s profitability

Return on Equity (ROE) weighs AMREP’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. 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 AMREP’s equity capital deployed. Its cost of equity is 8.49%. This means AMREP’s returns actually do not cover its own cost of equity, with a discrepancy of -7.38%. 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 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

NYSE:AXR Last Perf Mar 13th 18
NYSE:AXR Last Perf Mar 13th 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 reveals how much revenue can be generated from AMREP’s 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 inflated by excessive debt, we need to examine AMREP’s debt-to-equity level. Currently, AMREP has no debt which means its returns are driven purely by equity capital. This could explain why AMREP’s’ ROE is lower than its industry peers, most of which may have some degree of debt in its business.

NYSE:AXR Historical Debt Mar 13th 18
NYSE:AXR Historical Debt Mar 13th 18

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. AMREP’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 AMREP, there are three pertinent aspects you should further research:

  1. 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.

  2. Valuation: What is AMREP 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 AMREP is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of AMREP? 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.