This analysis is intended to introduce important early concepts to people who are starting to invest and looking to gauge the potential return on investment in Pfleiderer Group Spólka Akcyjna (WSE:PFL).
Pfleiderer Group Spólka Akcyjna (WSE:PFL) generated a below-average return on equity of 6.19% in the past 12 months, while its industry returned 7.47%. PFL’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 PFL’s performance. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of PFL’s returns. Check out our latest analysis for Pfleiderer Group Spólka Akcyjna
Breaking down Return on Equity
Return on Equity (ROE) is a measure of Pfleiderer Group Spólka Akcyjna’s profit relative to its shareholders’ equity. An ROE of 6.19% implies PLN0.062 returned on every PLN1 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. Pfleiderer Group Spólka Akcyjna’s cost of equity is 12.65%. Given a discrepancy of -6.46% between return and cost, this indicated that Pfleiderer Group Spólka Akcyjna 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:
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 reveals how much revenue can be generated from Pfleiderer Group Spólka Akcyjna’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 financial leverage can artificially inflate ROE, we need to look at how much debt Pfleiderer Group Spólka Akcyjna currently has. At 161.43%, Pfleiderer Group Spólka Akcyjna’s debt-to-equity ratio appears relatively high and indicates the below-average ROE is already being generated by significant leverage levels.
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Pfleiderer Group Spólka Akcyjna’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 Pfleiderer Group Spólka Akcyjna, there are three fundamental factors you should further research:
- 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 Pfleiderer Group Spólka Akcyjna 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 Pfleiderer Group Spólka Akcyjna is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Pfleiderer Group Spólka Akcyjna? 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.