Should You Expect HFF Inc (NYSE:HF) To Continue Delivering An ROE Of 39.54%?
This analysis is intended to introduce important early concepts to people who are starting to invest and want a simplistic look at the return on HFF Inc (NYSE:HF) stock.
With an ROE of 39.54%, HFF Inc (NYSE:HF) outpaced its own industry which delivered a less exciting 10.61% over the past year. Superficially, this looks great since we know that HF has generated big profits with little equity capital; however, ROE doesn’t tell us how much HF has borrowed in debt. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable HF’s ROE is. View out our latest analysis for HFF
What you must know about ROE
Return on Equity (ROE) weighs HFF’s profit against the level of its shareholders’ equity. An ROE of 39.54% implies $0.40 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
Returns are usually compared to costs to measure the efficiency of capital. HFF’s cost of equity is 9.89%. Since HFF’s return covers its cost in excess of 29.64%, its use of equity capital is efficient and likely to be sustainable. Simply put, HFF 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
Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. Asset turnover shows how much revenue HFF 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 financial leverage can artificially inflate ROE, we need to look at how much debt HFF currently has. Currently the debt-to-equity ratio stands at more than 2.5 times, which means its above-average ROE is driven by significant debt levels.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. HFF exhibits a strong ROE against its peers, as well as sufficient returns to cover its cost of equity. With debt capital in excess of equity, ROE may be inflated by the use of debt funding, raising questions over the sustainability of the company’s returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For HFF, there are three important aspects you should look at:
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 HFF 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 HFF is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of HFF? 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.
