With An ROE Of 8.15%, Has Home Federal Bancorp Inc of Louisiana’s (HFBL) Management Done A Good Job?
Home Federal Bancorp Inc of Louisiana (NASDAQ:HFBL) delivered an ROE of 8.15% over the past 12 months, which is an impressive feat relative to its industry average of 7.15% during the same period. Superficially, this looks great since we know that HFBL has generated big profits with little equity capital; however, ROE doesn’t tell us how much HFBL has borrowed in debt. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of HFBL’s ROE. View our latest analysis for Home Federal Bancorp of Louisiana
What you must know about ROE
Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. It essentially shows how much HFBL 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. HFBL’s cost of equity is 9.20%. This means HFBL’s returns actually do not cover its own cost of equity, with a discrepancy of -1.05%. 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 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 HFBL’s asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable HFBL’s capital structure is. Since ROE can be artificially increased through excessive borrowing, we should check HFBL’s historic debt-to-equity ratio. The debt-to-equity ratio currently stands at a balanced 105.75%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
What this means for you:
Are you a shareholder? HFBL exhibits a strong ROE against its peers, however it was not high enough to cover its own cost of equity this year. Since its high ROE is not fuelled by unsustainable debt, investors shouldn’t give up as HFBL still has capacity to improve shareholder returns by borrowing to invest in new projects in the future.
Are you a potential investor? If you are considering investing in HFBL, 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 Home Federal Bancorp of Louisiana to help you make a more informed investment decision. If you are not interested in HFBL anymore, you can use our free platform to see our list of stocks with Return on Equity over 20%.
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.
