Omni Market Tide Limited (DB:A4B) generated a below-average return on equity of 4.69% in the past 12 months, while its industry returned 12.44%. A4B’s results could indicate a relatively inefficient operation to its peers, and while this may be the case, it is important to understand what ROE is made up of and how it should be interpreted. Knowing these components could change your view on A4B’s performance. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of A4B’s returns. Let me show you what I mean by this. View our latest analysis for Omni Market Tide
What you must know about ROE
Return on Equity (ROE) weighs Omni Market Tide’s profit against the level of its shareholders’ equity. For example, if the company invests €1 in the form of equity, it will generate €0.05 in earnings from this. Investors seeking to maximise their return in the Application Software industry may want to choose 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.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of Omni Market Tide’s equity capital deployed. Its cost of equity is 9.18%. Given a discrepancy of -4.49% between return and cost, this indicated that Omni Market Tide 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:
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
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 Omni Market Tide’s asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. 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 Omni Market Tide’s debt-to-equity ratio to examine sustainability of its returns. Currently, Omni Market Tide has no debt which means its returns are driven purely by equity capital. This could explain why Omni Market Tide’s’ ROE is lower than its industry peers, most of which may have some degree of debt in its business.
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Omni Market Tide 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 Omni Market Tide’s return with a possible increase should the company decide to increase its debt levels. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Omni Market Tide, I’ve compiled three important factors you should look at:
- 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. Future Earnings: How does Omni Market Tide’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Omni Market Tide? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!