I am writing today to help inform people who are new to the stock market and want to begin learning the link between Pingtan Marine Enterprise Ltd (NASDAQ:PME)’s return fundamentals and stock market performance.
Pingtan Marine Enterprise Ltd (NASDAQ:PME) outperformed the Packaged Foods and Meats industry on the basis of its ROE – producing a higher 14.78% relative to the peer average of 11.96% over the past 12 months. While the impressive ratio tells us that PME has made significant profits from little equity capital, ROE doesn’t tell us if PME has borrowed debt to make this happen. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of PME’s ROE. View out our latest analysis for Pingtan Marine Enterprise
What you must know about ROE
Return on Equity (ROE) weighs Pingtan Marine Enterprise’s profit against the level of its shareholders’ equity. An ROE of 14.78% implies $0.15 returned on every $1 invested. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for Pingtan Marine Enterprise, which is 8.59%. Since Pingtan Marine Enterprise’s return covers its cost in excess of 6.19%, its use of equity capital is efficient and likely to be sustainable. Simply put, Pingtan Marine Enterprise 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
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 Pingtan Marine Enterprise can generate with its current 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 ROE can be artificially increased through excessive borrowing, we should check Pingtan Marine Enterprise’s historic debt-to-equity ratio. Currently the debt-to-equity ratio stands at a low 22.10%, which means its above-average ROE is driven by its ability to grow its profit without a significant debt burden.
While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. Pingtan Marine Enterprise’s above-industry ROE is encouraging, and is also in excess of its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. Although ROE can be a useful metric, it is only a small part of diligent research.
For Pingtan Marine Enterprise, there are three relevant factors 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 Pingtan Marine Enterprise 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 Pingtan Marine Enterprise is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Pingtan Marine Enterprise? 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.