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Is Thai Beverage Public Company Limited’s (SGX:Y92) ROE Of 21.72% Sustainable?

Brandie Wetzel

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want a simplistic look at the return on Thai Beverage Public Company Limited (SGX:Y92) stock.

Thai Beverage Public Company Limited (SGX:Y92) delivered an ROE of 21.72% over the past 12 months, which is an impressive feat relative to its industry average of 11.31% during the same period. While the impressive ratio tells us that Y92 has made significant profits from little equity capital, ROE doesn’t tell us if Y92 has borrowed debt to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether Y92’s ROE is actually sustainable. See our latest analysis for Thai Beverage

Breaking down Return on Equity

Return on Equity (ROE) weighs Thai Beverage’s profit against the level of its shareholders’ equity. An ROE of 21.72% implies SGD0.22 returned on every SGD1 invested. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.

Return on Equity = Net Profit ÷ Shareholders Equity

Returns are usually compared to costs to measure the efficiency of capital. Thai Beverage’s cost of equity is 9.21%. Given a positive discrepancy of 12.51% between return and cost, this indicates that Thai Beverage pays less for its capital than what it generates in return, which is a sign of capital efficiency. 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

SGX:Y92 Last Perf June 22nd 18

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 Thai Beverage’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 the company’s capital structure is. Since ROE can be artificially increased through excessive borrowing, we should check Thai Beverage’s historic debt-to-equity ratio. Currently the debt-to-equity ratio stands at a high 165.34%, which means its above-average ROE is driven by significant debt levels.

SGX:Y92 Historical Debt June 22nd 18

Next Steps:

ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Thai Beverage exhibits a strong ROE against its peers, as well as sufficient returns to cover its cost of equity. With debt capital in excess of equity, ROE may be inflated by the use of debt funding, raising questions over the sustainability of the company’s returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.

For Thai Beverage, there are three pertinent aspects you should look at:

  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 Thai Beverage 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 Thai Beverage is currently mispriced by the market.
  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Thai Beverage? 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.