Is Reckitt Benckiser Group plc’s (LON:RB.) 25.00% ROE Strong Compared To Its Industry?
Reckitt Benckiser Group plc (LSE:RB.) outperformed the Household Products industry on the basis of its ROE – producing a higher 25.00% relative to the peer average of 18.62% over the past 12 months. While the impressive ratio tells us that RB. has made significant profits from little equity capital, ROE doesn’t tell us if RB. has borrowed debt to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable RB.’s ROE is. Check out our latest analysis for Reckitt Benckiser Group
Breaking down Return on Equity
Return on Equity (ROE) is a measure of Reckitt Benckiser Group’s profit relative to its shareholders’ equity. An ROE of 25.00% implies £0.25 returned on every £1 invested. 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 Reckitt Benckiser Group’s equity capital deployed. Its cost of equity is 8.30%. Given a positive discrepancy of 16.70% between return and cost, this indicates that Reckitt Benckiser Group pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be dissected into three distinct 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
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 Reckitt Benckiser Group’s 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 Reckitt Benckiser Group’s historic debt-to-equity ratio. At 94.75%, Reckitt Benckiser Group’s debt-to-equity ratio appears balanced and indicates the above-average ROE is generated from its capacity to increase profit without a large debt burden.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Reckitt Benckiser Group’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. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Reckitt Benckiser Group, there are three key factors 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 Reckitt Benckiser Group 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 Reckitt Benckiser Group is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Reckitt Benckiser Group? 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.
