This analysis is intended to introduce important early concepts to people who are starting to invest and looking to gauge the potential return on investment in Allgäuer Brauhaus AG (MUN:ALB).
Allgäuer Brauhaus AG (MUN:ALB) performed in line with its brewers industry on the basis of its ROE – producing a return of 10.54% relative to the peer average of 10.92% over the past 12 months. But what is more interesting is whether ALB can sustain or improve on this level of return. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of ALB’s returns. Let me show you what I mean by this. View out our latest analysis for Allgäuer Brauhaus
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) weighs Allgäuer Brauhaus’s profit against the level of its shareholders’ equity. An ROE of 10.54% implies €0.11 returned on every €1 invested, so the higher the return, the better. Investors that are diversifying their portfolio based on industry may want to maximise their return in the Brewers sector by choosing 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
Returns are usually compared to costs to measure the efficiency of capital. Allgäuer Brauhaus’s cost of equity is 8.11%. While Allgäuer Brauhaus’s peers may have higher ROE, it may also incur higher cost of equity. An undesirable and unsustainable practice would be if returns exceeded cost. However, this is not the case for Allgäuer Brauhaus which is encouraging. ROE can be split up into three useful 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 Allgäuer Brauhaus can generate with its current 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. We can assess whether Allgäuer Brauhaus is fuelling ROE by excessively raising debt. Ideally, Allgäuer Brauhaus should have a balanced capital structure, which we can check by looking at the historic debt-to-equity ratio of the company. The ratio currently stands at a balanced 118.50%, meaning Allgäuer Brauhaus has not taken on excessively disproportionate debt to drive its returns. The company is able to produce profit growth without a substantial debt burden.
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Even though Allgäuer Brauhaus returned below the industry average, its ROE comes in excess of its cost of equity. Also, 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 Allgäuer Brauhaus, I’ve put together three key 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 Allgäuer Brauhaus 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 Allgäuer Brauhaus is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Allgäuer Brauhaus? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!