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What You Must Know About Republic Bancorp Inc’s (NASDAQ:RBCA.A) 8.23% ROE

Brad Riley

Republic Bancorp Inc’s (NASDAQ:RBCA.A) most recent return on equity was a substandard 8.23% relative to its industry performance of 8.85% over the past year. An investor may attribute an inferior ROE to a relatively inefficient performance, and whilst this can often be the case, knowing the nuts and bolts of the ROE calculation may change that perspective and give you a deeper insight into RBCA.A’s past performance. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of RBCA.A’s returns. Check out our latest analysis for Republic Bancorp

Peeling the layers of ROE – trisecting a company’s profitability

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 the company can generate in earnings given the amount of equity it has raised. 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

ROE is measured against cost of equity in order to determine the efficiency of Republic Bancorp’s equity capital deployed. Its cost of equity is 9.75%. This means Republic Bancorp’s returns actually do not cover its own cost of equity, with a discrepancy of -1.52%. 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

NasdaqGS:RBCA.A Last Perf Jan 26th 18
NasdaqGS:RBCA.A Last Perf Jan 26th 18

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. Asset turnover shows how much revenue Republic Bancorp can generate with its current asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be artificially increased through excessive borrowing, we should check Republic Bancorp’s historic debt-to-equity ratio. The debt-to-equity ratio currently stands at a high 153.55%, meaning the below-average ratio is already being driven by a large amount of debt.

NasdaqGS:RBCA.A Historical Debt Jan 26th 18
NasdaqGS:RBCA.A Historical Debt Jan 26th 18

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Republic Bancorp’s below-industry ROE is disappointing, furthermore, its returns were not even high enough to cover its own cost of equity. 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. Although ROE can be a useful metric, it is only a small part of diligent research.

For Republic Bancorp, I’ve put together three essential aspects you should further examine:


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.