The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want a simplistic look at the return on Willamette Valley Vineyards Inc (NASDAQ:WVVI) stock.
Willamette Valley Vineyards Inc (NASDAQ:WVVI) delivered a less impressive 6.61% ROE over the past year, compared to the 12.43% return generated by its industry. Though WVVI’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 WVVI’s below-average returns. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of WVVI’s returns. Let me show you what I mean by this. See our latest analysis for Willamette Valley Vineyards
Peeling the layers of ROE – trisecting a company’s profitability
Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. An ROE of 6.61% implies $0.066 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 Willamette Valley Vineyards, which is 8.59%. Given a discrepancy of -1.98% between return and cost, this indicated that Willamette Valley Vineyards 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
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover shows how much revenue Willamette Valley Vineyards 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 Willamette Valley Vineyards’s historic debt-to-equity ratio. The debt-to-equity ratio currently stands at a low 19.12%, meaning Willamette Valley Vineyards still has headroom to borrow debt to increase profits.
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Willamette Valley Vineyards exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. 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. Although ROE can be a useful metric, it is only a small part of diligent research.
For Willamette Valley Vineyards, 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.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Willamette Valley Vineyards’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Willamette Valley Vineyards? 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.