How Apar Industries Limited (NSE:APARINDS) Delivered A Better ROE Than Its Industry

With an ROE of 13.86%, Apar Industries Limited (NSEI:APARINDS) returned in-line to its own industry which delivered 12.52% over the past year. However, whether this ROE is actually impressive depends on if it can be maintained. A measure of sustainable returns is APARINDS’s financial leverage. If APARINDS 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 our latest analysis for Apar Industries

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. An ROE of 13.86% implies ₹0.14 returned on every ₹1 invested, so the higher the return, the better. Investors seeking to maximise their return in the Industrial Conglomerates 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.

Returns are usually compared to costs to measure the efficiency of capital. Apar Industries’s cost of equity is 13.40%. Given a positive discrepancy of 0.46% between return and cost, this indicates that Apar Industries 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:

The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover shows how much revenue Apar Industries can generate with its current 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. We can assess whether Apar Industries is fuelling ROE by excessively raising debt. Ideally, Apar Industries should have a balanced capital structure, which we can check by looking at the historic debt-to-equity ratio of the company. The most recent ratio is 40.70%, which is sensible and indicates Apar Industries 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.

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Apar Industries 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. Although ROE can be a useful metric, it is only a small part of diligent research.

For Apar Industries, I've compiled three pertinent 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 Apar Industries 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 Apar Industries is currently mispriced by the market.
• 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Apar Industries? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!