Advertisement
U.S. markets open in 4 hours 26 minutes
  • S&P Futures

    5,218.00
    +3.25 (+0.06%)
     
  • Dow Futures

    39,240.00
    +17.00 (+0.04%)
     
  • Nasdaq Futures

    18,248.50
    +17.00 (+0.09%)
     
  • Russell 2000 Futures

    2,047.90
    -1.90 (-0.09%)
     
  • Crude Oil

    82.76
    +0.04 (+0.05%)
     
  • Gold

    2,156.00
    -8.30 (-0.38%)
     
  • Silver

    25.09
    -0.17 (-0.67%)
     
  • EUR/USD

    1.0851
    -0.0026 (-0.24%)
     
  • 10-Yr Bond

    4.3400
    0.0000 (0.00%)
     
  • Vix

    14.42
    +0.09 (+0.63%)
     
  • GBP/USD

    1.2687
    -0.0042 (-0.33%)
     
  • USD/JPY

    150.3940
    +1.2960 (+0.87%)
     
  • Bitcoin USD

    63,600.02
    -4,286.79 (-6.31%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,723.96
    +1.41 (+0.02%)
     
  • Nikkei 225

    40,003.60
    +263.20 (+0.66%)
     

Did Momo Inc (NASDAQ:MOMO) Create Value For Shareholders?

With an ROE of 30.65%, Momo Inc (NASDAQ:MOMO) outpaced its own industry which delivered a less exciting 12.05% over the past year. On the surface, this looks fantastic since we know that MOMO has made large profits from little equity capital; however, ROE doesn’t tell us if management have borrowed heavily to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable MOMO’s ROE is. View our latest analysis for Momo

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

Return on Equity (ROE) is a measure of Momo’s profit relative to its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.31 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 Momo’s equity capital deployed. Its cost of equity is 11.58%. This means Momo returns enough to cover its own cost of equity, with a buffer of 19.07%. This sustainable practice implies that the company pays less 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

NasdaqGS:MOMO Last Perf Mar 14th 18
NasdaqGS:MOMO Last Perf Mar 14th 18

The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover shows how much revenue Momo 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 Momo’s historic debt-to-equity ratio. Currently, Momo has no debt which means its returns are driven purely by equity capital. Therefore, the level of financial leverage has no impact on ROE, and the ratio is a representative measure of the efficiency of all its capital employed firm-wide.

NasdaqGS:MOMO Historical Debt Mar 14th 18
NasdaqGS:MOMO Historical Debt Mar 14th 18

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Momo’s above-industry ROE is encouraging, and is also in excess of its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. Although ROE can be a useful metric, it is only a small part of diligent research.

For Momo, there are three fundamental 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 Momo 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 Momo is currently mispriced by the market.

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

Advertisement