Is DEMIRE Deutsche Mittelstand Real Estate AG’s (ETR:DMRE) 15.36% ROE Strong Compared To Its Industry?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between company’s fundamentals and stock market performance.
DEMIRE Deutsche Mittelstand Real Estate AG (ETR:DMRE) outperformed the Real Estate Operating Companies industry on the basis of its ROE – producing a higher 15.36% relative to the peer average of 10.93% over the past 12 months. On the surface, this looks fantastic since we know that DMRE has made large profits from little equity capital; however, ROE doesn’t tell us if management have borrowed heavily to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable DMRE’s ROE is.
See our latest analysis for DEMIRE Deutsche Mittelstand Real Estate
Breaking down Return on Equity
Return on Equity (ROE) weighs DEMIRE Deutsche Mittelstand Real Estate’s profit against the level of 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
Returns are usually compared to costs to measure the efficiency of capital. DEMIRE Deutsche Mittelstand Real Estate’s cost of equity is 14.88%. Since DEMIRE Deutsche Mittelstand Real Estate’s return covers its cost in excess of 0.48%, its use of equity capital is efficient and likely to be sustainable. Simply put, DEMIRE Deutsche Mittelstand Real Estate 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 DEMIRE Deutsche Mittelstand Real Estate 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 DEMIRE Deutsche Mittelstand Real Estate’s debt-to-equity level. At 202.81%, DEMIRE Deutsche Mittelstand Real Estate’s debt-to-equity ratio appears relatively high and indicates the above-average ROE is generated by significant leverage levels.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. DEMIRE Deutsche Mittelstand Real Estate’s above-industry ROE is encouraging, and is also in excess of its cost of equity. Its high debt level means its strong ROE may be driven by debt funding which raises concerns over the sustainability of DEMIRE Deutsche Mittelstand Real Estate’s returns. Although ROE can be a useful metric, it is only a small part of diligent research.
For DEMIRE Deutsche Mittelstand Real Estate, I’ve put together three essential factors you should further examine:
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.
Future Earnings: How does DEMIRE Deutsche Mittelstand Real Estate’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of DEMIRE Deutsche Mittelstand Real Estate? 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.
