Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt (BUSE:BIF) delivered an ROE of 50.15% over the past 12 months, which is an impressive feat relative to its industry average of 10.23% during the same period. Superficially, this looks great since we know that BIF has generated big profits with little equity capital; however, ROE doesn’t tell us how much BIF has borrowed in debt. We’ll take a closer look today at factors like financial leverage to determine whether BIF’s ROE is actually sustainable. Check out our latest analysis for Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt
Breaking down Return on Equity
Return on Equity (ROE) weighs Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’s profit against the level of its shareholders’ equity. For example, if the company invests HUF1 in the form of equity, it will generate HUF0.5 in earnings from this. 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. Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’s cost of equity is 8.55%. Given a positive discrepancy of 41.60% between return and cost, this indicates that Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be broken down into three different ratios: net profit margin, asset turnover, and financial leverage. This is called the 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. Asset turnover shows how much revenue Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt can generate with its current 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 Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt currently has. The debt-to-equity ratio currently stands at a low 36.38%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
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. Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt exhibits a strong ROE against its peers, as well as sufficient returns to cover its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. Although ROE can be a useful metric, it is only a small part of diligent research.
For Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt, I’ve put together three pertinent factors you should further examine:
- 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.
- Future Earnings: How does Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt? 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.