Why Yoma Strategic Holdings Ltd (SGX:Z59) May Not Be As Efficient As Its Industry
This article is intended for those of you who are at the beginning of your investing journey and want to learn about Return on Equity using a real-life example.
Yoma Strategic Holdings Ltd’s (SGX:Z59) most recent return on equity was a substandard 1.1% relative to its industry performance of 6.4% over the past year. Though Z59’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 Z59’s below-average returns. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of Z59’s returns.
Check out our latest analysis for Yoma Strategic Holdings
What you must know about ROE
Return on Equity (ROE) is a measure of Yoma Strategic Holdings’s profit relative to its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. 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
ROE is measured against cost of equity in order to determine the efficiency of Yoma Strategic Holdings’s equity capital deployed. Its cost of equity is 8.5%. Since Yoma Strategic Holdings’s return does not cover its cost, with a difference of -7.4%, this means its current use of equity is not efficient and not sustainable. Very simply, Yoma Strategic Holdings pays more for its capital than what it generates 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:
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 reveals how much revenue can be generated from Yoma Strategic Holdings’s 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 Yoma Strategic Holdings currently has. The debt-to-equity ratio currently stands at a sensible 41.3%, meaning the ROE is a result of its capacity to produce profit growth without a huge debt burden.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Yoma Strategic Holdings’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. Although, its appropriate level of leverage means investors can be more confident in the sustainability of Yoma Strategic Holdings’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 Yoma Strategic Holdings, there are three important 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 Yoma Strategic Holdings 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 Yoma Strategic Holdings is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Yoma Strategic Holdings? 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
