How Westlake Chemical Partners LP (WLKP) Delivered A Better ROE Than Its Industry
Westlake Chemical Partners LP (NYSE:WLKP) delivered an ROE of 36.95% over the past 12 months, which is an impressive feat relative to its industry average of 13.96% during the same period. While the impressive ratio tells us that WLKP has made significant profits from little equity capital, ROE doesn’t tell us if WLKP has borrowed debt to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether WLKP’s ROE is actually sustainable. See our latest analysis for WLKP
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) is a measure of WLKP’s profit relative to its shareholders’ equity. An ROE of 36.95% implies $0.37 returned on every $1 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 measured against cost of equity in order to determine the efficiency of WLKP’s equity capital deployed. Its cost of equity is 11.00%. Since WLKP’s return covers its cost in excess of 25.95%, its use of equity capital is efficient and likely to be sustainable. Simply put, WLKP 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 reveals how much revenue can be generated from WLKP’s asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable WLKP’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine WLKP’s debt-to-equity level. The debt-to-equity ratio currently stands at a low 48.02%, 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? WLKP’s ROE is impressive relative to the industry average and also covers its cost of equity. Since its high ROE is not likely driven by high debt, it might be a good time to top up on your current holdings if your fundamental research reaffirms this analysis. 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 WLKP, basing your decision on ROE alone is certainly not sufficient. I recommend you do additional fundamental analysis by looking through our most recent infographic report on Westlake Chemical Partners 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.
