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ISDN Holdings Limited (SGX:I07) Delivered A Better ROE Than The Industry, Here’s Why

Ingrid Hart

ISDN Holdings Limited (SGX:I07) delivered an ROE of 10.95% over the past 12 months, which is an impressive feat relative to its industry average of 9.43% during the same period. Superficially, this looks great since we know that I07 has generated big profits with little equity capital; however, ROE doesn’t tell us how much I07 has borrowed in debt. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of I07’s ROE. View our latest analysis for ISDN Holdings

Breaking down ROE — the mother of all ratios

Return on Equity (ROE) weighs ISDN Holdings’s profit against the level of its shareholders’ equity. For example, if the company invests SGD1 in the form of equity, it will generate SGD0.11 in earnings from this. 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. ISDN Holdings’s cost of equity is 8.38%. This means ISDN Holdings returns enough to cover its own cost of equity, with a buffer of 2.57%. 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

SGX:I07 Last Perf Feb 26th 18

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. The other component, asset turnover, illustrates how much revenue ISDN Holdings can make from its 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 the company’s capital structure is. Since financial leverage can artificially inflate ROE, we need to look at how much debt ISDN Holdings currently has. The debt-to-equity ratio currently stands at a low 9.52%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.

SGX:I07 Historical Debt Feb 26th 18

Next Steps:

While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. ISDN Holdings exhibits a strong ROE against its peers, as well as sufficient returns to cover its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. Although ROE can be a useful metric, it is only a small part of diligent research.

For ISDN Holdings, I’ve compiled three pertinent aspects you should further examine:

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.