What You Must Know About Dragon-Ukrainian Properties & Development plc’s (LON:DUPD) 0.46% ROE
Dragon-Ukrainian Properties & Development plc’s (AIM:DUPD) most recent return on equity was a substandard 0.46% relative to its industry performance of 11.98% over the past year. Though DUPD’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 DUPD’s below-average returns. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of DUPD’s returns. See our latest analysis for Dragon-Ukrainian Properties & Development
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) weighs Dragon-Ukrainian Properties & Development’s profit against the level of its shareholders’ equity. An ROE of 0.46% implies £0 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
Returns are usually compared to costs to measure the efficiency of capital. Dragon-Ukrainian Properties & Development’s cost of equity is 8.30%. This means Dragon-Ukrainian Properties & Development’s returns actually do not cover its own cost of equity, with a discrepancy of -7.84%. This isn’t sustainable as it implies, very simply, that the company pays more for its capital than what it generates in return. ROE can be split up into three useful 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 the business is with its cost management. The other component, asset turnover, illustrates how much revenue Dragon-Ukrainian Properties & Development 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 ROE can be artificially increased through excessive borrowing, we should check Dragon-Ukrainian Properties & Development’s historic debt-to-equity ratio. Currently, Dragon-Ukrainian Properties & Development has no debt which means its returns are driven purely by equity capital. This could explain why Dragon-Ukrainian Properties & Development’s’ ROE is lower than its industry peers, most of which may have some degree of debt in its business.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Dragon-Ukrainian Properties & Development exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. However, ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of returns, which has headroom to increase further. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Dragon-Ukrainian Properties & Development, I’ve put together three relevant factors you should further research:
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 Dragon-Ukrainian Properties & Development’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 Dragon-Ukrainian Properties & Development? 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.
