With an ROE of 50.15%, Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt (BUSE:BIF) outpaced its own industry which delivered a less exciting 10.18% over the past year. But what is more interesting is whether BIF can sustain this above-average ratio. 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. See our latest analysis for Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) is a measure of Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’s profit relative to its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. Investors that are diversifying their portfolio based on industry may want to maximise their return in the Real Estate Operating Companies 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
ROE is measured against cost of equity in order to determine the efficiency of Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’s equity capital deployed. Its cost of equity is 10.17%. Given a positive discrepancy of 39.98% 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 dissected into three distinct 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
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 Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’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 Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt’s debt-to-equity ratio to examine sustainability of its returns. Currently, Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt has no debt which means its returns are driven purely by equity capital. Therefore, the level of financial leverage has no impact on ROE, and the ratio is a representative measure of the efficiency of all its capital employed firm-wide.
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 exhibits a strong ROE against its peers, as well as sufficient returns to cover 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. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt, there are three key aspects you should further examine:
- 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!