Is The Hackett Group Inc’s (HCKT) 28.88% ROE Good Enough Compared To Its Industry?
The Hackett Group Inc (NASDAQ:HCKT) delivered an ROE of 28.88% over the past 12 months, which is an impressive feat relative to its industry average of 14.79% during the same period. On the surface, this looks fantastic since we know that HCKT 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 HCKT’s ROE is. Check out our latest analysis for Hackett Group
Breaking down Return on Equity
Return on Equity (ROE) is a measure of HCKT’s profit relative to its shareholders’ equity. An ROE of 28.88% implies $0.29 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
ROE is measured against cost of equity in order to determine the efficiency of HCKT’s equity capital deployed. Its cost of equity is 9.55%. Since HCKT’s return covers its cost in excess of 19.32%, its use of equity capital is efficient and likely to be sustainable. Simply put, HCKT 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 HCKT is with its cost management. Asset turnover reveals how much revenue can be generated from HCKT’s asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable HCKT’s capital structure is. Since ROE can be artificially increased through excessive borrowing, we should check HCKT’s historic debt-to-equity ratio. At 21.77%, HCKT’s debt-to-equity ratio appears low 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? HCKT’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.
Are you a potential investor? If HCKT has been on your watch list for a while, making an investment decision based on ROE alone is unwise. I recommend you do additional fundamental analysis by looking through our most recent infographic report on Hackett Group to help you make a more informed investment decision. If you are not interested in HCKT 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.
