What You Must Know About CalAmp Corp’s (CAMP) Return on Equity
CalAmp Corp’s (NASDAQ:CAMP) most recent return on equity was a substandard 2.08% relative to its industry performance of 8.50% over the past year. Though CAMP's recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on CAMP's below-average returns. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of CAMP's returns. Check out our latest analysis for CalAmp
Breaking down Return on Equity
Return on Equity (ROE) is a measure of CAMP’s profit relative to its shareholders’ equity. For example, if CAMP invests $1 in the form of equity, it will generate $0.02 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
ROE is measured against cost of equity in order to determine the efficiency of CAMP’s equity capital deployed. Its cost of equity is 10.95%. Since CAMP’s return does not cover its cost, with a difference of -8.88%, this means its current use of equity is not efficient and not sustainable. Very simply, CAMP 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
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover reveals how much revenue can be generated from CAMP’s asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable CAMP’s capital structure is. Since ROE can be artificially increased through excessive borrowing, we should check CAMP’s historic debt-to-equity ratio. At 80.83%, CAMP’s debt-to-equity ratio appears sensible and indicates its ROE is generated from its capacity to increase profit without a large debt burden.
What this means for you:
Are you a shareholder? CAMP’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. Since its existing ROE is not fuelled by unsustainable debt, investors shouldn’t give up as CAMP still has capacity to improve shareholder returns by borrowing to invest in new projects in the future. 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 you are considering investing in CAMP, looking at ROE on its own is not enough to make a well-informed decision. I recommend you do additional fundamental analysis by looking through our most recent infographic report on CalAmp 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.
