This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Olympique Lyonnais Groupe SA (EPA:OLG)’s return fundamentals and stock market performance.
Olympique Lyonnais Groupe SA (EPA:OLG) generated a below-average return on equity of 5.13% in the past 12 months, while its industry returned 9.56%. Though OLG’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 OLG’s below-average returns. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of OLG’s returns. Check out our latest analysis for Olympique Lyonnais Groupe
What you must know about ROE
Return on Equity (ROE) is a measure of Olympique Lyonnais Groupe’s profit relative to its shareholders’ equity. An ROE of 5.13% implies €0.051 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 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 Olympique Lyonnais Groupe, which is 13.23%. Given a discrepancy of -8.10% between return and cost, this indicated that Olympique Lyonnais Groupe 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
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. The other component, asset turnover, illustrates how much revenue Olympique Lyonnais Groupe can make from its 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 artificially increased through excessive borrowing, we should check Olympique Lyonnais Groupe’s historic debt-to-equity ratio. The debt-to-equity ratio currently stands at a balanced 109.84%, meaning the ROE is a result of its capacity to produce profit growth without a huge debt burden.
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Olympique Lyonnais Groupe’s below-industry ROE is disappointing, furthermore, its returns were not even high enough to cover its own cost of equity. However, ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of returns, which has headroom to increase further. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Olympique Lyonnais Groupe, I’ve compiled three relevant factors you should look at:
- 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.
- Valuation: What is Olympique Lyonnais Groupe worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Olympique Lyonnais Groupe is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Olympique Lyonnais Groupe? 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.