How Wayside Technology Group Inc (NASDAQ:WSTG) Delivered A Better ROE Than Its Industry
This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Wayside Technology Group Inc (NASDAQ:WSTG).
Wayside Technology Group Inc (NASDAQ:WSTG) delivered an ROE of 13.44% over the past 12 months, which is an impressive feat relative to its industry average of 10.81% during the same period. Superficially, this looks great since we know that WSTG has generated big profits with little equity capital; however, ROE doesn’t tell us how much WSTG has borrowed in debt. We’ll take a closer look today at factors like financial leverage to determine whether WSTG’s ROE is actually sustainable. View out our latest analysis for Wayside Technology Group
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of Wayside Technology Group’s profit relative to its shareholders’ equity. An ROE of 13.44% implies $0.13 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 Wayside Technology Group, which is 9.02%. This means Wayside Technology Group returns enough to cover its own cost of equity, with a buffer of 4.41%. This sustainable practice implies that the company pays less 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
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover shows how much revenue Wayside Technology Group can generate with its current 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 Wayside Technology Group’s historic debt-to-equity ratio. Currently, Wayside Technology Group has no debt which means its returns are driven purely by equity capital. Therefore, the level of financial leverage has no impact on ROE, and the ratio is a representative measure of the efficiency of all its capital employed firm-wide.
Next Steps:
While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. Wayside Technology Group’s above-industry ROE is encouraging, and is also in excess of its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. Although ROE can be a useful metric, it is only a small part of diligent research.
For Wayside Technology Group, I’ve put together three pertinent factors you should further examine:
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.
Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Wayside Technology Group’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Wayside Technology Group? 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.
