How Did Ever-Glory International Group Inc’s (NASDAQ:EVK) 11.23% ROE Fare Against The Industry?
Ever-Glory International Group Inc’s (NASDAQ:EVK) most recent return on equity was a substandard 11.23% relative to its industry performance of 12.85% over the past year. Though EVK’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 EVK’s below-average returns. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of EVK’s returns. Let me show you what I mean by this. Check out our latest analysis for Ever-Glory International Group
Breaking down Return on Equity
Return on Equity (ROE) is a measure of Ever-Glory International Group’s profit relative to its shareholders’ equity. An ROE of 11.23% implies $0.11 returned on every $1 invested. 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
Returns are usually compared to costs to measure the efficiency of capital. Ever-Glory International Group’s cost of equity is 11.88%. Given a discrepancy of -0.65% between return and cost, this indicated that Ever-Glory International Group may be paying more for its capital than what it’s generating 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
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 Ever-Glory International Group 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 Ever-Glory International Group’s historic debt-to-equity ratio. Currently the debt-to-equity ratio stands at a low 47.77%, which means Ever-Glory International Group still has headroom to take on more leverage in order to increase profits.
What this means for you:
Are you a shareholder? EVK’s below-industry ROE is disappointing, furthermore, its returns were not even high enough to cover its own cost of equity. However, investors shouldn’t despair since ROE is not inflated by excessive debt, which means EVK still has room to improve shareholder returns by raising debt to fund new investments. 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 EVK, basing your decision on ROE alone is certainly not sufficient. I recommend you do additional fundamental analysis by looking through our most recent infographic report on Ever-Glory International Group 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.
