What is Behind TTK Prestige Limited’s (BOM:517506) Superior ROE?

This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in TTK Prestige Limited (BOM:517506).

TTK Prestige Limited (BOM:517506) outperformed the household appliances industry on the basis of its ROE – producing a higher 25.84% relative to the peer average of 12.25% over the past 12 months. But what is more interesting is whether 517506 can sustain this above-average ratio. Sustainability can be gauged by a company’s financial leverage – the more debt it has, the higher ROE is pumped up in the short term, at the expense of long term interest payment burden. Let me show you what I mean by this. Check out our latest analysis for TTK Prestige

Peeling the layers of ROE – trisecting a company’s profitability

Return on Equity (ROE) is a measure of TTK Prestige’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 seeking to maximise their return in the Household Appliances industry may want to choose the highest returning stock. However, this can be misleading as each firm has different costs of equity and debt levels i.e. the more debt TTK Prestige has, the higher ROE is pumped up in the short term, at the expense of long term interest payment burden.

Return on Equity = Net Profit ÷ Shareholders Equity

ROE is measured against cost of equity in order to determine the efficiency of TTK Prestige’s equity capital deployed. Its cost of equity is 13.58%. Since TTK Prestige’s return covers its cost in excess of 12.26%, its use of equity capital is efficient and likely to be sustainable. Simply put, TTK Prestige pays less for its capital than what it generates 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:

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

BSE:517506 Last Perf June 12th 18
BSE:517506 Last Perf June 12th 18

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. Asset turnover shows how much revenue TTK Prestige 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. 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 TTK Prestige’s debt-to-equity ratio to examine sustainability of its returns. The most recent ratio is 12.67%, which is sensible and indicates TTK Prestige 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.

BSE:517506 Historical Debt June 12th 18
BSE:517506 Historical Debt June 12th 18

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. TTK Prestige’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. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.

For TTK Prestige, I’ve compiled three important aspects you should further research:

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