With An ROE Of 6.43%, Can Neuhof Textil-Holding Aktiengesellschaft (MUN:SPN) Catch Up To The Industry?
Neuhof Textil-Holding Aktiengesellschaft (MUN:SPN) generated a below-average return on equity of 6.43% in the past 12 months, while its industry returned 10.14%. SPN’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 SPN’s performance. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of SPN’s returns. Let me show you what I mean by this. See our latest analysis for Neuhof Textil-Holding
What you must know about ROE
Return on Equity (ROE) weighs Neuhof Textil-Holding’s profit against the level of its shareholders’ equity. An ROE of 6.43% implies €0.06 returned on every €1 invested. 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 Neuhof Textil-Holding, which is 8.13%. This means Neuhof Textil-Holding’s returns actually do not cover its own cost of equity, with a discrepancy of -1.70%. 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 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
Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. Asset turnover reveals how much revenue can be generated from Neuhof Textil-Holding’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 Neuhof Textil-Holding’s debt-to-equity level. Currently, Neuhof Textil-Holding has no debt which means its returns are driven purely by equity capital. This could explain why Neuhof Textil-Holding’s’ ROE is lower than its industry peers, most of which may have some degree of debt in its business.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Neuhof Textil-Holding exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. However, ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of returns, which has headroom to increase further. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Neuhof Textil-Holding, there are three pertinent aspects you should look at:
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 Neuhof Textil-Holding 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 Neuhof Textil-Holding is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Neuhof Textil-Holding? 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.
