I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in 1347 Property Insurance Holdings Inc (NASDAQ:PIH).
1347 Property Insurance Holdings Inc (NASDAQ:PIH) generated a below-average return on equity of 3.10% in the past 12 months, while its industry returned 9.44%. PIH’s results could indicate a relatively inefficient operation to its peers, and while this may be the case, it is important to understand what ROE is made up of and how it should be interpreted. Knowing these components could change your view on PIH’s performance. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of PIH’s returns. See our latest analysis for 1347 Property Insurance Holdings
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) is a measure of 1347 Property Insurance Holdings’s profit relative to its shareholders’ equity. An ROE of 3.10% implies $0.031 returned on every $1 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
ROE is measured against cost of equity in order to determine the efficiency of 1347 Property Insurance Holdings’s equity capital deployed. Its cost of equity is 8.59%. Given a discrepancy of -5.49% between return and cost, this indicated that 1347 Property Insurance Holdings may be paying more for its capital than what it’s generating 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:
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. The other component, asset turnover, illustrates how much revenue 1347 Property Insurance Holdings can make from its 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 financial leverage can artificially inflate ROE, we need to look at how much debt 1347 Property Insurance Holdings currently has. Currently 1347 Property Insurance Holdings has virtually no debt, which means its returns are predominantly driven by equity capital. This could explain why 1347 Property Insurance Holdings’s’ ROE is lower than its industry peers, most of which may have some degree of debt in its business.
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. 1347 Property Insurance Holdings exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. Although, its appropriate level of leverage means investors can be more confident in the sustainability of 1347 Property Insurance Holdings’s return with a possible increase should the company decide to increase its debt levels. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For 1347 Property Insurance Holdings, 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 1347 Property Insurance Holdings’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 1347 Property Insurance Holdings? 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.