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Why Select Bancorp Inc’s (NASDAQ:SLCT) ROE Of 2.90% Does Not Tell The Whole Story

Andrew Carroll

Select Bancorp Inc’s (NASDAQ:SLCT) most recent return on equity was a substandard 2.90% relative to its industry performance of 8.21% 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 SLCT’s past performance. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of SLCT’s returns. Let me show you what I mean by this. See our latest analysis for Select Bancorp

Breaking down Return on Equity

Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. An ROE of 2.90% implies $0.03 returned on every $1 invested. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.

Return on Equity = Net Profit ÷ Shareholders Equity

ROE is measured against cost of equity in order to determine the efficiency of Select Bancorp’s equity capital deployed. Its cost of equity is 9.86%. Given a discrepancy of -6.96% between return and cost, this indicated that Select Bancorp may be paying more for its capital than what it’s generating in return. ROE can be split up into three useful 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

NasdaqGM:SLCT Last Perf Mar 14th 18
NasdaqGM:SLCT Last Perf Mar 14th 18

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 Select Bancorp can generate with its current asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since financial leverage can artificially inflate ROE, we need to look at how much debt Select Bancorp currently has. The debt-to-equity ratio currently stands at a low 31.63%, meaning Select Bancorp still has headroom to borrow debt to increase profits.

NasdaqGM:SLCT Historical Debt Mar 14th 18
NasdaqGM:SLCT Historical Debt Mar 14th 18

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Select Bancorp’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 Select Bancorp’s return with a possible increase should the company decide to increase its debt levels. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.

For Select Bancorp, I’ve compiled three important factors you should further research:

  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. Valuation: What is Select Bancorp 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 Select Bancorp is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Select Bancorp? 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.