Is Verkkokauppacom Oyj’s (HEL:VERK) ROE Of 23.88% Sustainable?
Verkkokauppacom Oyj (HLSE:VERK) outperformed the Internet and Direct Marketing Retail industry on the basis of its ROE – producing a higher 23.88% relative to the peer average of 10.95% over the past 12 months. Superficially, this looks great since we know that VERK has generated big profits with little equity capital; however, ROE doesn’t tell us how much VERK has borrowed in debt. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable VERK’s ROE is. View our latest analysis for Verkkokauppa.com Oyj
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) weighs Verkkokauppa.com Oyj’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. Verkkokauppa.com Oyj’s cost of equity is 12.98%. Since Verkkokauppa.com Oyj’s return covers its cost in excess of 10.89%, its use of equity capital is efficient and likely to be sustainable. Simply put, Verkkokauppa.com Oyj pays less for its capital than what it generates in return. ROE can be dissected into three distinct 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. Asset turnover reveals how much revenue can be generated from Verkkokauppa.com Oyj’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 ROE can be inflated by excessive debt, we need to examine Verkkokauppa.com Oyj’s debt-to-equity level. Currently, Verkkokauppa.com Oyj has no debt which means its returns are driven purely by equity capital. Therefore, the level of financial leverage has no impact on ROE, and the ratio is a representative measure of the efficiency of all its capital employed firm-wide.
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. Verkkokauppa.com Oyj’s ROE is impressive relative to the industry average and also covers 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. Although ROE can be a useful metric, it is only a small part of diligent research.
For Verkkokauppa.com Oyj, I’ve compiled three pertinent aspects you should look at:
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 Verkkokauppa.com Oyj 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 Verkkokauppa.com Oyj is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Verkkokauppa.com Oyj? 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.
