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With An ROE Of 0.63%, Has ASV Holdings Inc’s (ASV) Management Done A Good Job?

ASV Holdings Inc’s (NASDAQ:ASV) most recent return on equity was a substandard 0.63% relative to its industry performance of 11.65% over the past year. ASV’s results could indicate a relatively inefficient operation to its peers, and while this may be the case, it is important to understand what ROE is made up of and how it should be interpreted. Knowing these components could change your view on ASV’s performance. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of ASV’s returns. Let me show you what I mean by this. See our latest analysis for ASV

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

Return on Equity (ROE) weighs ASV’s profit against the level of its shareholders’ equity. For example, if ASV invests $1 in the form of equity, it will generate $0.01 in earnings from this. 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 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 ASV, which is 10.29%. Since ASV’s return does not cover its cost, with a difference of -9.67%, this means its current use of equity is not efficient and not sustainable. Very simply, ASV pays more 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:

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:ASV Last Perf Dec 2nd 17
NasdaqCM:ASV Last Perf Dec 2nd 17

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient ASV is with its cost management. Asset turnover reveals how much revenue can be generated from ASV’s asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable ASV’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine ASV’s debt-to-equity level. At 37.99%, ASV’s debt-to-equity ratio appears low and indicates that ASV still has room to increase leverage and grow its profits.

NasdaqCM:ASV Historical Debt Dec 2nd 17
NasdaqCM:ASV Historical Debt Dec 2nd 17

What this means for you:

Are you a shareholder? ASV’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. However, investors shouldn’t despair since ROE is not inflated by excessive debt, which means ASV still has room to improve shareholder returns by raising debt to fund new investments. 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 you are considering investing in ASV, looking at ROE on its own is not enough to make a well-informed decision. I recommend you do additional fundamental analysis by looking through our most recent infographic report on ASV Holdings 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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