What You Must Know About MB Financial Inc’s (MBFI) 7.93% ROE
MB Financial Inc (NASDAQ:MBFI) delivered a less impressive 7.93% ROE over the past year, compared to the 8.92% return generated by its industry. Though MBFI'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 MBFI's below-average returns. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of MBFI's returns. View our latest analysis for MB Financial
What you must know about ROE
Return on Equity (ROE) is a measure of MBFI’s profit relative to its shareholders’ equity. For example, if MBFI invests $1 in the form of equity, it will generate $0.08 in earnings from this. 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
ROE is measured against cost of equity in order to determine the efficiency of MBFI’s equity capital deployed. Its cost of equity is 11.27%. This means MBFI’s returns actually do not cover its own cost of equity, with a discrepancy of -3.33%. 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
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 MBFI 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 MBFI’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine MBFI’s debt-to-equity level. Currently the debt-to-equity ratio stands at a balanced 95.71%, which means its ROE is driven by its ability to grow its profit without a significant debt burden.
What this means for you:
Are you a shareholder? MBFI’s below-industry ROE is disappointing, furthermore, its returns were not even high enough to cover its own cost of equity. Since its existing ROE is not fuelled by unsustainable debt, investors shouldn’t give up as MBFI 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 MBFI 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 MB Financial 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.
