Why Apex Resources Inc's (CVE:APX) ROE Of 1.40% Does Not Tell The Whole Story

Apex Resources Inc (TSXV:APX) generated a below-average return on equity of 1.40% in the past 12 months, while its industry returned 9.02%. Though APX's recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on APX's below-average returns. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of APX's returns. See our latest analysis for Apex Resources

What you must know about ROE

Return on Equity (ROE) weighs Apex Resources’s profit against the level of its shareholders’ equity. For example, if the company invests CA$1 in the form of equity, it will generate CA$0.01 in earnings from this. Investors seeking to maximise their return in the Diversified Metals and Mining industry may want to choose the highest returning stock. However, this can be misleading as each firm has different costs of equity and debt levels i.e. the more debt Apex Resources has, the higher ROE is pumped up in the short term, at the expense of long term interest payment burden.

ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for Apex Resources, which is 16.74%. Given a discrepancy of -15.33% between return and cost, this indicated that Apex Resources may be paying more for its capital than what it’s generating in return. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover reveals how much revenue can be generated from Apex Resources’s asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. We can assess whether Apex Resources is fuelling ROE by excessively raising debt. Ideally, Apex Resources should have a balanced capital structure, which we can check by looking at the historic debt-to-equity ratio of the company. Currently, Apex Resources has no debt which means its returns are driven purely by equity capital. This could explain why Apex Resources's' ROE is lower than its industry peers, most of which may have some degree of debt in its business.

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Apex Resources’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. However, ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of returns, which has headroom to increase further. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.

For Apex Resources, I've compiled three key aspects you should further research:

• 1. 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.
• 2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for Apex Resources's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
• 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Apex Resources? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.