Is Willdan Group Inc’s (NASDAQ:WLDN) 15.67% ROE Good Enough Compared To Its Industry?
Willdan Group Inc (NASDAQ:WLDN) outperformed the Research and Consulting Services industry on the basis of its ROE – producing a higher 15.67% relative to the peer average of 13.67% over the past 12 months. Superficially, this looks great since we know that WLDN has generated big profits with little equity capital; however, ROE doesn’t tell us how much WLDN has borrowed in debt. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable WLDN’s ROE is. View our latest analysis for Willdan Group
Breaking down Return on Equity
Return on Equity (ROE) weighs Willdan Group’s profit against the level of its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.16 in earnings from this. 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 Willdan Group’s equity capital deployed. Its cost of equity is 8.49%. Since Willdan Group’s return covers its cost in excess of 7.17%, its use of equity capital is efficient and likely to be sustainable. Simply put, Willdan Group pays less 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
Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. The other component, asset turnover, illustrates how much revenue Willdan Group can make from its asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be inflated by excessive debt, we need to examine Willdan Group’s debt-to-equity level. At 4.91%, Willdan Group’s debt-to-equity ratio appears low and indicates the above-average ROE is generated from its capacity to increase profit without a large debt burden.
Next Steps:
While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. Willdan Group’s above-industry ROE is encouraging, and is also in excess of its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Willdan Group, I’ve put together three essential 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 Willdan Group 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 Willdan Group is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Willdan Group? 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.
