Wabash National Corporation (NYSE:WNC) delivered an ROE of 21.92% over the past 12 months, which is an impressive feat relative to its industry average of 11.45% during the same period. Superficially, this looks great since we know that WNC has generated big profits with little equity capital; however, ROE doesn’t tell us how much WNC has borrowed in debt. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of WNC’s ROE. Check out our latest analysis for Wabash National
What you must know about ROE
Return on Equity (ROE) weighs Wabash National’s profit against the level of its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.22 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 Wabash National’s equity capital deployed. Its cost of equity is 11.24%. Since Wabash National’s return covers its cost in excess of 10.68%, its use of equity capital is efficient and likely to be sustainable. Simply put, Wabash National pays less 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:
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. The other component, asset turnover, illustrates how much revenue Wabash National can make from its asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since financial leverage can artificially inflate ROE, we need to look at how much debt Wabash National currently has. The debt-to-equity ratio currently stands at a balanced 105.63%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Wabash National’s ROE is impressive relative to the industry average and also covers its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Wabash National, I’ve compiled three essential aspects you should look at:
- 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.
- Valuation: What is Wabash National worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Wabash National is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Wabash National? 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.