Did Flushing Financial Corporation (FFIC) Create Value For Shareholders?
Flushing Financial Corporation (NASDAQ:FFIC) delivered an ROE of 9.57% over the past 12 months, which is an impressive feat relative to its industry average of 8.95% during the same period. While the impressive ratio tells us that FFIC has made significant profits from little equity capital, ROE doesn’t tell us if FFIC has borrowed debt to make this happen. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of FFIC’s ROE. See our latest analysis for FFIC
Breaking down Return on Equity
Return on Equity (ROE) weighs FFIC’s profit against the level of its shareholders’ equity. An ROE of 9.57% implies $0.1 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
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 FFIC, which is 11.02%. Since FFIC’s return does not cover its cost, with a difference of -1.45%, this means its current use of equity is not efficient and not sustainable. Very simply, FFIC 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
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover shows how much revenue FFIC can generate with its current asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since financial leverage can artificially inflate ROE, we need to look at how much debt FFIC currently has. At over 2.5 times, FFIC’s debt-to-equity ratio is very high and indicates the above-average ROE is generated by significant leverage levels.
What this means for you:
Are you a shareholder? FFIC exhibits a strong ROE against its peers, however it was not high enough to cover its own cost of equity this year. Additionally, its high debt level appears to be the driver of a strong ROE and is something you should be mindful of before adding more of FFIC to your portfolio.
Are you a potential investor? If you are considering investing in FFIC, 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 Flushing Financial to help you make a more informed investment decision. If you are not interested in FFIC anymore, you can use our free platform to see our list of stocks with Return on Equity over 20%.
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.