How Did Magnificent Hotel Investments Limited’s (HKG:201) 3.84% ROE Fare Against The Industry?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between Magnificent Hotel Investments Limited (HKG:201)’s return fundamentals and stock market performance.
Magnificent Hotel Investments Limited (HKG:201) generated a below-average return on equity of 3.84% in the past 12 months, while its industry returned 7.56%. 201’s results could indicate a relatively inefficient operation to its peers, and while this may be the case, it is important to understand what ROE is made up of and how it should be interpreted. Knowing these components could change your view on 201’s performance. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of 201’s returns. View out our latest analysis for Magnificent Hotel Investments
Breaking down Return on Equity
Return on Equity (ROE) weighs Magnificent Hotel Investments’s profit against the level of its shareholders’ equity. For example, if the company invests HK$1 in the form of equity, it will generate HK$0.038 in earnings from this. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of Magnificent Hotel Investments’s equity capital deployed. Its cost of equity is 16.78%. Given a discrepancy of -12.94% between return and cost, this indicated that Magnificent Hotel Investments 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
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover reveals how much revenue can be generated from Magnificent Hotel Investments’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 Magnificent Hotel Investments’s debt-to-equity level. Currently the debt-to-equity ratio stands at a low 18.26%, which means Magnificent Hotel Investments still has headroom to take on more leverage in order to increase profits.
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. Magnificent Hotel Investments’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. Although, its appropriate level of leverage means investors can be more confident in the sustainability of Magnificent Hotel Investments’s return with a possible increase should the company decide to increase its debt levels. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Magnificent Hotel Investments, I’ve put together three essential aspects you should further research:
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 Magnificent Hotel Investments 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 Magnificent Hotel Investments is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Magnificent Hotel Investments? 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.
