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Why CPI Computer Peripherals International (ATH:CPI) Delivered An Inferior ROE Compared To The Industry

CPI Computer Peripherals International (ATSE:CPI) delivered a less impressive 1.07% ROE over the past year, compared to the 11.19% return generated by its industry. Though CPI’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 CPI’s below-average returns. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of CPI’s returns. Let me show you what I mean by this. See our latest analysis for CPI Computer Peripherals International

What you must know about ROE

Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. For example, if the company invests €1 in the form of equity, it will generate €0.01 in earnings from this. 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

Returns are usually compared to costs to measure the efficiency of capital. CPI Computer Peripherals International’s cost of equity is 12.30%. This means CPI Computer Peripherals International’s returns actually do not cover its own cost of equity, with a discrepancy of -11.23%. This isn’t sustainable as it implies, very simply, that the company pays more for its capital than what it generates 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:

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

ATSE:CPI Last Perf Mar 9th 18
ATSE:CPI Last Perf Mar 9th 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 CPI Computer Peripherals International’s asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine CPI Computer Peripherals International’s debt-to-equity level. At 57.72%, CPI Computer Peripherals International’s debt-to-equity ratio appears sensible and indicates its ROE is generated from its capacity to increase profit without a large debt burden.

ATSE:CPI Historical Debt Mar 9th 18
ATSE:CPI Historical Debt Mar 9th 18

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. CPI Computer Peripherals International’s below-industry ROE is disappointing, furthermore, its returns were not even high enough to cover its own cost of equity. Although, its appropriate level of leverage means investors can be more confident in the sustainability of CPI Computer Peripherals International’s return with a possible increase should the company decide to increase its debt levels. Although ROE can be a useful metric, it is only a small part of diligent research.

For CPI Computer Peripherals International, there are three pertinent factors you should further examine:

  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. Future Earnings: How does CPI Computer Peripherals International’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of CPI Computer Peripherals International? 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.

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