Why ICC Holdings Inc (ICCH) Delivered An Inferior ROE Compared To The Industry
ICC Holdings Inc (NASDAQ:ICCH) delivered a less impressive 5.23% ROE over the past year, compared to the 8.79% return generated by its industry. An investor may attribute an inferior ROE to a relatively inefficient performance, and whilst this can often be the case, knowing the nuts and bolts of the ROE calculation may change that perspective and give you a deeper insight into ICCH's past performance. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of ICCH's returns. Check out our latest analysis for ICC Holdings
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of ICCH’s profit relative to its shareholders’ equity. An ROE of 5.23% implies $0.05 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
Returns are usually compared to costs to measure the efficiency of capital. ICCH’s cost of equity is 8.98%. Given a discrepancy of -3.75% between return and cost, this indicated that ICCH may be paying more for its capital than what it’s generating in return. ROE can be dissected into three distinct 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
Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient ICCH is with its cost management. Asset turnover reveals how much revenue can be generated from ICCH’s asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be inflated by excessive debt, we need to examine ICCH’s debt-to-equity level. At 7.79%, ICCH’s debt-to-equity ratio appears low and indicates that ICCH still has room to increase leverage and grow its profits.
What this means for you:
Are you a shareholder? ICCH exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. Since its existing ROE is not fuelled by unsustainable debt, investors shouldn’t give up as ICCH still has capacity to improve shareholder returns by borrowing to invest in new projects in the future.
Are you a potential investor? If you are considering investing in ICCH, 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 ICC Holdings to help you make a more informed investment decision. If you are not interested in ICCH anymore, you can use our free platform to see our list of stocks with Return on Equity over 20%.
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.
