With An ROE Of 5.23%, Has WVS Financial Corp’s (NASDAQ:WVFC) Management Done A Good Job?
WVS Financial Corp (NASDAQ:WVFC) generated a below-average return on equity of 5.23% in the past 12 months, while its industry returned 6.46%. WVFC’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 WVFC’s performance. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of WVFC’s returns. Let me show you what I mean by this. Check out our latest analysis for WVS Financial
What you must know about ROE
Return on Equity (ROE) is a measure of WVS Financial’s profit relative to its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.05 in earnings from this. 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 WVS Financial’s equity capital deployed. Its cost of equity is 9.97%. This means WVS Financial’s returns actually do not cover its own cost of equity, with a discrepancy of -4.73%. This isn’t sustainable as it implies, very simply, that the company pays more 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:
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. The other component, asset turnover, illustrates how much revenue WVS Financial can make from its 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 WVS Financial’s debt-to-equity level. At over 2.5 times, WVS Financial’s debt-to-equity ratio is very high and indicates the below-average ROE is already being generated by significant leverage levels.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. WVS Financial’s below-industry ROE is disappointing, furthermore, its returns were not even high enough to cover its own cost of equity. Although, its appropriate level of leverage means investors can be more confident in the sustainability of WVS Financial’s return with a possible increase should the company decide to increase its debt levels. Although ROE can be a useful metric, it is only a small part of diligent research.
For WVS Financial, there are three important aspects you should further research:
1. 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.
2. Valuation: What is WVS Financial 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 WVS Financial is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of WVS Financial? 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.
