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With A Recent ROE Of 5.54%, Can US Energy Corp (USEG) Catch Up To Its Industry?

US Energy Corp (NASDAQ:USEG) generated a below-average return on equity of 5.54% in the past 12 months, while its industry returned 9.36%. 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 USEG’s past performance. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of USEG’s returns. Check out our latest analysis for U.S. Energy

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

Return on Equity (ROE) weighs USEG’s profit against the level of its shareholders’ equity. It essentially shows how much USEG can generate in earnings given the amount of equity it has raised. 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 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 USEG, which is 12.68%. Given a discrepancy of -7.15% between return and cost, this indicated that USEG may be paying more for its capital than what it’s generating 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

NasdaqCM:USEG Last Perf Nov 20th 17
NasdaqCM:USEG Last Perf Nov 20th 17

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient USEG is with its cost management. Asset turnover shows how much revenue USEG 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 USEG’s capital structure is. Since ROE can be artificially increased through excessive borrowing, we should check USEG’s historic debt-to-equity ratio. Currently the debt-to-equity ratio stands at a high 215.98%, which means its below-average ROE is already being driven by significant debt levels.

NasdaqCM:USEG Historical Debt Nov 20th 17
NasdaqCM:USEG Historical Debt Nov 20th 17

What this means for you:

Are you a shareholder? USEG’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. Additionally, with debt capital in excess of equity, the existing ROE is being generated by debt funding, which is something you should be aware of before buying more USEG shares. If you’re looking for new ideas for high-returning stocks, you should take a look at our free platform to see the list of stocks with Return on Equity over 20%.

Are you a potential investor? If USEG has been on your watch list for a while, making an investment decision based on ROE alone is unwise. I recommend you do additional fundamental analysis by looking through our most recent infographic report on U.S. Energy to help you make a more informed investment decision.


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.

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