This article is intended for those of you who are at the beginning of your investing journey and want a simplistic look at the return on Tartisan Nickel Corp (CNSX:TN) stock.
Tartisan Nickel Corp (CNSX:TN) outperformed the precious metals and minerals industry on the basis of its ROE – producing a higher 31.39% relative to the peer average of 11.25% over the past 12 months. Though, the impressiveness of TN’s ROE is contingent on whether this industry-beating level can be sustained. This can be measured by looking at the company’s financial leverage. With more debt, TN can invest even more and earn more money, thus pushing up its returns. However, ROE only measures returns against equity, not debt. This can be distorted, so let’s take a look at it further. See our latest analysis for Tartisan Nickel
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of Tartisan Nickel’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. If investors diversify their portfolio by industry, they may want to maximise their return in the Precious Metals and Minerals sector by investing in the highest returning stock. However, this can be deceiving as each company has varying costs of equity and debt levels, which could exaggeratedly push up ROE at the same time as accumulating high interest expense.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of Tartisan Nickel’s equity capital deployed. Its cost of equity is 17.16%. Since Tartisan Nickel’s return covers its cost in excess of 14.22%, its use of equity capital is efficient and likely to be sustainable. Simply put, Tartisan Nickel 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:
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 shows how much revenue Tartisan Nickel can generate with its current asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. We can assess whether Tartisan Nickel is fuelling ROE by excessively raising debt. Ideally, Tartisan Nickel should have a balanced capital structure, which we can check by looking at the historic debt-to-equity ratio of the company. Currently, Tartisan Nickel 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.
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. Tartisan Nickel’s ROE is impressive relative to the industry average and also covers its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Tartisan Nickel, I’ve compiled three key factors 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.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Tartisan Nickel’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Tartisan Nickel? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!