Public Joint-Stock Company Mobile TeleSystems (NYSE:MBT) delivered an ROE of 45.56% over the past 12 months, which is an impressive feat relative to its industry average of 12.67% during the same period. While the impressive ratio tells us that MBT has made significant profits from little equity capital, ROE doesn’t tell us if MBT has borrowed debt to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable MBT’s ROE is. View our latest analysis for Mobile TeleSystems
What you must know about ROE
Return on Equity (ROE) is a measure of Mobile TeleSystems’s profit relative to its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. 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
Returns are usually compared to costs to measure the efficiency of capital. Mobile TeleSystems’s cost of equity is 8.49%. Since Mobile TeleSystems’s return covers its cost in excess of 37.07%, its use of equity capital is efficient and likely to be sustainable. Simply put, Mobile TeleSystems 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
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 Mobile TeleSystems’s asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be inflated by excessive debt, we need to examine Mobile TeleSystems’s debt-to-equity level. The debt-to-equity ratio currently stands at a high 244.41%, meaning the above-average ratio is a result of a large amount of debt.
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Mobile TeleSystems’s above-industry ROE is encouraging, and is also in excess of its cost of equity. Its high debt level means its strong ROE may be driven by debt funding which raises concerns over the sustainability of Mobile TeleSystems’s returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Mobile TeleSystems, I’ve put together three key factors you should further research:
- 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 Mobile TeleSystems 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 Mobile TeleSystems is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Mobile TeleSystems? 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.