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Montero Mining and Exploration Ltd (TSXV:MON) Delivered A Better ROE Than The Industry, Here’s Why

With an ROE of 10.92%, Montero Mining and Exploration Ltd (TSXV:MON) outpaced its own industry which delivered a less exciting 7.41% over the past year. On the surface, this looks fantastic since we know that MON has made large profits from little equity capital; however, ROE doesn’t tell us if management have borrowed heavily to make this happen. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of MON’s ROE. View our latest analysis for Montero Mining and Exploration

Breaking down ROE — the mother of all ratios

Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. It essentially shows how much MON can generate in earnings given the amount of equity it has raised. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.

Return on Equity = Net Profit ÷ Shareholders Equity

Returns are usually compared to costs to measure the efficiency of capital. MON’s cost of equity is 17.53%. Since MON’s return does not cover its cost, with a difference of -6.61%, this means its current use of equity is not efficient and not sustainable. Very simply, MON pays more 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

TSXV:MON Last Perf Oct 12th 17
TSXV:MON Last Perf Oct 12th 17

Essentially, profit margin shows how much money the company makes after paying for all its expenses. The other component, asset turnover, illustrates how much revenue MON 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 MON’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine MON’s debt-to-equity level. Currently the debt-to-equity ratio stands at a low 29.67%, which means its above-average ROE is driven by its ability to grow its profit without a significant debt burden.

TSXV:MON Historical Debt Oct 12th 17
TSXV:MON Historical Debt Oct 12th 17

What this means for you:

Are you a shareholder? MON’s above-industry ROE is noteworthy, but it was not high enough to cover its own cost of equity. However, investors shouldn’t despair since ROE is not inflated by excessive debt, which means MON still has room to improve shareholder returns by raising debt to fund new investments. 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 MON 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 Montero Mining and Exploration 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.

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