Urstadt Biddle Properties Inc (NYSE:UBA) delivered 5.9% ROE over the past year, compared to 12.31% generated by its industry. While an inferior ROE points towards a relatively inefficient performance, knowing the nuts and bolts of ROE calculation may change that perspective. Check out our latest analysis for Urstadt Biddle Properties
Breaking down Return on Equity
ROE ratio basically calculates the net income as a percentage of total capital committed by shareholders, namely shareholders’ equity. While an ROE ratio of more than 15% would draw any investor’s attention, historically, established companies in the developed countries have delivered an ROE between 10% and 12%.
Return on Equity = Net Profit ÷ Shareholders Equity
For a company to create value for its shareholders, it must generate an ROE higher than the cost of equity. Unlike debt-holders, there is no predefined return for equity investors. However, an expected return to account for market risk can be arrived at using the Capital Asset Pricing Model. For UBA, it stands at 8.35% versus its ROE of 5.9%.
Using Dupont Analysis, we find out that ROE is composed of three ratios: profit margin, asset turnover, and financial leverage. The method reflects the impact of change in key figures in both the income statement and the balance sheet. The analysis provides a bird’s-eye view on the strengths and weaknesses of the company.
ROE = annual net profit ÷ shareholders’ equity
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = profit margin × asset turnover × financial leverage
Among the ratios affecting ROE, the profit margin is the most important as it highlights the operational efficiency of a company. To a potential investor, the ideal scenario would be profit increasing at a higher rate than the revenue. The asset turnover for a capital intensive industry such as bricks-and-mortar retail would be substantially lower than the e-commerce retail industry. A comparison with the industry can be drawn through ROA, which represents earnings as a percentage of assets. Urstadt Biddle Properties’s ROA stood at 3.3% in the past year, compared to the industry’s 3.48%.
The last but not the least is the financial leverage. It’s an important ratio as a company can hide its poor operating and asset-use efficiency by increasing leverage. Thus, along with ROE, we should look at the Return on capital, which reflects earnings as a percentage of overall capital employed, including debt. For UBA, ROC stood at 4% versus the industry’s 3.8%.
Why is ROE called the mother of all ratios
ROE is called the mother of all ratios for a reason. It helps gauge a company’s efficiency both through the income statement and the balance sheet, along with telling you how just changing the capital structure of the company can impact perceived return. What are the analysts thinking about Urstadt Biddle Properties’s ROE in three years? I recommend you see our latest FREE analysis report to find out!
If you are not interested in UBA anymore, you can use our free platform to see my list of stocks with Return on Equity over 20%.