This article is intended for those of you who are at the beginning of your investing journey and looking to gauge the potential return on investment in OraSure Technologies Inc (NASDAQ:OSUR).
OraSure Technologies Inc’s (NASDAQ:OSUR) most recent return on equity was a substandard 6.33% relative to its industry performance of 11.63% over the past year. 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 OSUR’s past performance. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of OSUR’s returns. Let me show you what I mean by this. See our latest analysis for OraSure Technologies
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of OraSure Technologies’s profit relative to its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.063 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
ROE is measured against cost of equity in order to determine the efficiency of OraSure Technologies’s equity capital deployed. Its cost of equity is 8.59%. Given a discrepancy of -2.26% between return and cost, this indicated that OraSure Technologies 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. Asset turnover shows how much revenue OraSure Technologies can generate with its current 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 ROE can be artificially increased through excessive borrowing, we should check OraSure Technologies’s historic debt-to-equity ratio. Currently, OraSure Technologies has no debt which means its returns are driven purely by equity capital. This could explain why OraSure Technologies’s’ ROE is lower than its industry peers, most of which may have some degree of debt in its business.
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. OraSure Technologies 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 OraSure Technologies’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 OraSure Technologies, I’ve put together three important aspects 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.
- Valuation: What is OraSure Technologies 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 OraSure Technologies is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of OraSure Technologies? 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.