Sberbank of Russia (MCX:SBER) Delivered A Better ROE Than The Industry, Here’s Why
With an ROE of 21.79%, Sberbank of Russia (MISX:SBER) outpaced its own industry which delivered a less exciting 8.77% over the past year. Superficially, this looks great since we know that SBER has generated big profits with little equity capital; however, ROE doesn’t tell us how much SBER has borrowed in debt. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable SBER’s ROE is. Check out our latest analysis for Sberbank of Russia
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) weighs Sberbank of Russia’s profit against the level of its shareholders’ equity. An ROE of 21.79% implies RUB0.22 returned on every RUB1 invested. 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 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 Sberbank of Russia, which is 13.41%. Since Sberbank of Russia’s return covers its cost in excess of 8.38%, its use of equity capital is efficient and likely to be sustainable. Simply put, Sberbank of Russia 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:
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 Sberbank of Russia’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 Sberbank of Russia’s debt-to-equity level. The debt-to-equity ratio currently stands at a sensible 77.80%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Sberbank of Russia exhibits a strong ROE against its peers, as well as sufficient returns to cover its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Sberbank of Russia, I’ve put together three key 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 Sberbank of Russia 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 Sberbank of Russia is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Sberbank of Russia? 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.
