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Will Ten Peaks Coffee Company Inc (TSX:TPK) Continue To Underperform Its Industry?

Ten Peaks Coffee Company Inc’s (TSX:TPK) most recent return on equity was a substandard 11.70% relative to its industry performance of 13.45% over the past year. Though TPK's recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on TPK's below-average returns. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of TPK's returns. Check out our latest analysis for Ten Peaks Coffee Company

Peeling the layers of ROE – trisecting a company’s profitability

Return on Equity (ROE) is a measure of TPK’s profit relative to its shareholders’ equity. It essentially shows how much TPK can generate in earnings given the amount of equity it has raised. 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 TPK, which is 8.49%. While TPK’s peers may have higher ROE, it may also incur higher cost of equity. An undesirable and unsustainable practice would be if returns exceeded cost. However, this is not the case for TPK which is encouraging. 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

TSX:TPK Last Perf Oct 7th 17
TSX:TPK Last Perf Oct 7th 17

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient TPK is with its cost management. The other component, asset turnover, illustrates how much revenue TPK can make from its asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be artificially increased through excessive borrowing, we should check TPK’s historic debt-to-equity ratio. At 24.34%, TPK’s debt-to-equity ratio appears low and indicates that TPK still has room to increase leverage and grow its profits.

TSX:TPK Historical Debt Oct 7th 17
TSX:TPK Historical Debt Oct 7th 17

What this means for you:

Are you a shareholder? While TPK exhibits a weak ROE against its peers, its returns are sufficient enough to cover its cost of equity, which means its generating value for shareholders. Since ROE is not inflated by excessive debt, it might be a good time to add more of TPK to your portfolio if your personal research is confirming what the ROE is telling you. If you're looking for new ideas for high-returning stocks, you should take a look at our free platform to see the list of stocks with Return on Equity over 20%.

Are you a potential investor? If you are considering investing in TPK, 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 Ten Peaks Coffee Company to help you make a more informed investment decision.


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.

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