The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want a simplistic look at the return on Public Joint Stock Company Aeroflot – Russian Airlines (MCX:AFLT) stock.
With an ROE of 28.88%, Public Joint Stock Company Aeroflot – Russian Airlines (MCX:AFLT) outpaced its own industry which delivered a less exciting 22.15% over the past year. Superficially, this looks great since we know that AFLT has generated big profits with little equity capital; however, ROE doesn’t tell us how much AFLT has borrowed in debt. We’ll take a closer look today at factors like financial leverage to determine whether AFLT’s ROE is actually sustainable. View out our latest analysis for Aeroflot – Russian Airlines
What you must know about ROE
Return on Equity (ROE) is a measure of Aeroflot – Russian Airlines’s profit relative to its shareholders’ equity. An ROE of 28.88% implies RUB0.29 returned on every RUB1 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 measured against cost of equity in order to determine the efficiency of Aeroflot – Russian Airlines’s equity capital deployed. Its cost of equity is 13.87%. This means Aeroflot – Russian Airlines returns enough to cover its own cost of equity, with a buffer of 15.01%. This sustainable practice implies that the company pays less for its capital than what it generates in return. ROE can be broken down into three different 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. Asset turnover shows how much revenue Aeroflot – Russian Airlines 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 the company’s capital structure is. Since financial leverage can artificially inflate ROE, we need to look at how much debt Aeroflot – Russian Airlines currently has. Currently the debt-to-equity ratio stands at a high 157.26%, 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. Aeroflot – Russian Airlines’s above-industry ROE is encouraging, and is also in excess of its cost of equity. With debt capital in excess of equity, ROE may be inflated by the use of debt funding, raising questions over the sustainability of the company’s returns. Although ROE can be a useful metric, it is only a small part of diligent research.
For Aeroflot – Russian Airlines, I’ve put together three key 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 Aeroflot – Russian Airlines 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 Aeroflot – Russian Airlines is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Aeroflot – Russian Airlines? 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.