I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt (BUSE:BIF) stock.
Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt (BUSE:BIF) outperformed the real estate operating companies industry on the basis of its ROE – producing a higher 50.15% relative to the peer average of 11.76% over the past 12 months. Though, the impressiveness of BIF’s ROE is contingent on whether this industry-beating level can be sustained. A measure of sustainable returns is BIF’s financial leverage. If BIF borrows debt to invest in its business, its profits will be higher. But ROE does not capture any debt, so we only see high profits and low equity, which is great on the surface. But today let’s take a deeper dive below this surface. View out our latest analysis for Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt
Peeling the layers of ROE – trisecting a company’s profitability
Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. Investors seeking to maximise their return in the Real Estate Operating Companies 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 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 Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt, which is 8.55%. Given a positive discrepancy of 41.60% between return and cost, this indicates that Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt pays less for its capital than what it generates in return, which is a sign of capital efficiency. 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 Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’s asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. We can determine if Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’s ROE is inflated by borrowing high levels of debt. Generally, a balanced capital structure means its returns will be sustainable over the long run. We can examine this by looking at Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’s debt-to-equity ratio. The most recent ratio is 36.38%, which is sensible and indicates Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt has not taken on too much leverage. Thus, we can conclude its above-average ROE is generated from its capacity to increase profit without a large debt burden.
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’s ROE is impressive relative to the industry average and also covers its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. Although ROE can be a useful metric, it is only a small part of diligent research.
For Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt, I’ve compiled three important aspects you should further research:
- 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.
- Future Earnings: How does Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’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.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!