How Did Super Retail Group Limited’s (ASX:SUL) 13.50% ROE Fare Against The Industry?
With an ROE of 13.50%, Super Retail Group Limited (ASX:SUL) outpaced its own industry which delivered a less exciting 13.31% over the past year. Superficially, this looks great since we know that SUL has generated big profits with little equity capital; however, ROE doesn’t tell us how much SUL has borrowed in debt. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable SUL’s ROE is. Check out our latest analysis for Super Retail Group
What you must know about ROE
Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. For example, if SUL invests $1 in the form of equity, it will generate $0.14 in earnings from this. 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. SUL’s cost of equity is 8.55%. Given a positive discrepancy of 4.95% between return and cost, this indicates that SUL pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be broken down into three different 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 SUL’s asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable SUL’s capital structure is. Since ROE can be artificially increased through excessive borrowing, we should check SUL’s historic debt-to-equity ratio. At 53.31%, SUL’s debt-to-equity ratio appears sensible and indicates the above-average ROE is generated from its capacity to increase profit without a large debt burden.
What this means for you:
Are you a shareholder? SUL’s ROE is impressive relative to the industry average and also covers its cost of equity. Since ROE is not inflated by excessive debt, it might be a good time to add more of SUL to your portfolio if your personal research is confirming what the ROE is telling you.
Are you a potential investor? If you are considering investing in SUL, looking at ROE on its own is not enough to make a well-informed decision. I recommend you do additional fundamental analysis by looking through our most recent infographic report on Super Retail Group to help you make a more informed investment decision. If you are not interested in SUL 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.
