Yandex NV (NASDAQ:YNDX) generated a below-average return on equity of 7.71% in the past 12 months, while its industry returned 12.14%. Though YNDX’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 YNDX’s below-average returns. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of YNDX’s returns. View our latest analysis for Yandex
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of Yandex’s profit relative to its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.08 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 Yandex’s equity capital deployed. Its cost of equity is 10.10%. Given a discrepancy of -2.39% between return and cost, this indicated that Yandex 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
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover shows how much revenue Yandex 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 financial leverage can artificially inflate ROE, we need to look at how much debt Yandex currently has. At 20.28%, Yandex’s debt-to-equity ratio appears low and indicates that Yandex still has room to increase leverage and grow its profits.
What this means for you:
Are you a shareholder? YNDX exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. Since its existing ROE is not fuelled by unsustainable debt, investors shouldn’t give up as YNDX still has capacity to improve shareholder returns by borrowing to invest in new projects in the future. If you’re looking for new ideas for high-returning stocks, you should take a look at our free platform to see the list of stocks with Return on Equity over 20%.
Are you a potential investor? If YNDX has been on your watch list for a while, making an investment decision based on ROE alone is unwise. I recommend you do additional fundamental analysis by looking through our most recent infographic report on Yandex to help you make a more informed investment decision.
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.