Should You Expect Anglo Pacific Group plc (LSE:APF) To Continue Delivering An ROE Of 15.61%?
Anglo Pacific Group plc (LSE:APF) delivered an ROE of 15.61% over the past 12 months, which is an impressive feat relative to its industry average of 5.74% during the same period. Superficially, this looks great since we know that APF has generated big profits with little equity capital; however, ROE doesn’t tell us how much APF has borrowed in debt. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of APF’s ROE. See our latest analysis for APF
What you must know about ROE
Return on Equity (ROE) weighs APF’s profit against the level of its shareholders’ equity. It essentially shows how much APF can generate in earnings given the amount of equity it has raised. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.
Return on Equity = Net Profit ÷ Shareholders Equity
Returns are usually compared to costs to measure the efficiency of capital. APF’s cost of equity is 8.30%. This means APF returns enough to cover its own cost of equity, with a buffer of 7.31%. This sustainable practice implies that the company pays less for its capital than what it generates in return. 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
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. The other component, asset turnover, illustrates how much revenue APF can make from its 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 APF currently has. The debt-to-equity ratio currently stands at a low 2.91%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
What this means for you:
Are you a shareholder? APF’s above-industry ROE is encouraging, and is also in excess of its cost of equity. Since its high ROE is not likely driven by high debt, it might be a good time to top up on your current holdings if your fundamental research reaffirms this analysis. 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 APF, 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 Anglo Pacific 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.
