With an ROE of 72.38%, PBF Logistics LP (NYSE:PBFX) outpaced its own industry which delivered a less exciting 11.31% over the past year. While the impressive ratio tells us that PBFX has made significant profits from little equity capital, ROE doesn’t tell us if PBFX has borrowed debt to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable PBFX’s ROE is. Check out our latest analysis for PBF Logistics
Breaking down ROE — the mother of all ratios
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 PBF Logistics’s equity capital deployed. Its cost of equity is 12.72%. Since PBF Logistics’s return covers its cost in excess of 59.66%, its use of equity capital is efficient and likely to be sustainable. Simply put, PBF Logistics 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
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 PBF Logistics’s 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 PBF Logistics’s historic debt-to-equity ratio. Currently the debt-to-equity ratio stands at more than 2.5 times, which means its above-average ROE is driven by significant debt levels.
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. PBF Logistics’s ROE is impressive relative to the industry average and also covers its cost of equity. Its high debt level means its strong ROE may be driven by debt funding which raises concerns over the sustainability of PBF Logistics’s returns. Although ROE can be a useful metric, it is only a small part of diligent research.
For PBF Logistics, I’ve compiled three pertinent aspects you should further examine:
- 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 PBF Logistics 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 PBF Logistics is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of PBF Logistics? 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.