How Did Euro Asia Premier Real Estate Company Limited's (MUN:JT9) 5.58% ROE Fare Against The Industry?

Euro Asia Premier Real Estate Company Limited (MUN:JT9) generated a below-average return on equity of 5.58% in the past 12 months, while its industry returned 10.78%. An investor may attribute an inferior ROE to a relatively inefficient performance, and whilst this can often be the case, knowing the nuts and bolts of the ROE calculation may change that perspective and give you a deeper insight into JT9's past performance. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of JT9's returns. See our latest analysis for Euro Asia Premier Real Estate

Breaking down ROE — the mother of all ratios

Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. For example, if the company invests €1 in the form of equity, it will generate €0.06 in earnings from this. Investors that are diversifying their portfolio based on industry may want to maximise their return in the Real Estate Development sector by choosing the highest returning stock. But this can be misleading as each company has different costs of equity and also varying debt levels, which could artificially push up ROE whilst accumulating high interest expense.

Returns are usually compared to costs to measure the efficiency of capital. Euro Asia Premier Real Estate’s cost of equity is 8.35%. Given a discrepancy of -2.77% between return and cost, this indicated that Euro Asia Premier Real Estate 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:

The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover reveals how much revenue can be generated from Euro Asia Premier Real Estate’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. ROE can be inflated by disproportionately high levels of debt. This is also unsustainable due to the high interest cost that the company will also incur. Thus, we should look at Euro Asia Premier Real Estate’s debt-to-equity ratio to examine sustainability of its returns. Currently, Euro Asia Premier Real Estate has no debt which means its returns are driven purely by equity capital. This could explain why Euro Asia Premier Real Estate'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. Euro Asia Premier Real Estate exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. Although, its appropriate level of leverage means investors can be more confident in the sustainability of Euro Asia Premier Real Estate’s return with a possible increase should the company decide to increase its debt levels. Although ROE can be a useful metric, it is only a small part of diligent research.

For Euro Asia Premier Real Estate, I've put together three key aspects you should further examine:

• 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. Valuation: What is Euro Asia Premier Real Estate 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 Euro Asia Premier Real Estate is currently mispriced by the market.
• 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Euro Asia Premier Real Estate? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!