The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Bharatiya Global Infomedia Limited (NSE:BGLOBAL)’s return fundamentals and stock market performance.
Bharatiya Global Infomedia Limited (NSE:BGLOBAL) generated a below-average return on equity of 0.07% in the past 12 months, while its industry returned 12.96%. Though BGLOBAL’s recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on BGLOBAL’s below-average returns. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of BGLOBAL’s returns. See our latest analysis for Bharatiya Global Infomedia
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) is a measure of Bharatiya Global Infomedia’s profit relative to its shareholders’ equity. For example, if the company invests ₹1 in the form of equity, it will generate ₹0.00070 in earnings from this. Investors seeking to maximise their return in the IT Consulting and Other Services 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 Bharatiya Global Infomedia 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 Bharatiya Global Infomedia’s equity capital deployed. Its cost of equity is 13.55%. This means Bharatiya Global Infomedia’s returns actually do not cover its own cost of equity, with a discrepancy of -13.48%. This isn’t sustainable as it implies, very simply, that the company pays more 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:
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
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 reveals how much revenue can be generated from Bharatiya Global Infomedia’s asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. We can assess whether Bharatiya Global Infomedia is fuelling ROE by excessively raising debt. Ideally, Bharatiya Global Infomedia 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 5.29%, which is sensible and indicates Bharatiya Global Infomedia has not taken on too much leverage. Thus, we can conclude its below-average ROE may be a result of low debt, and Bharatiya Global Infomedia still has room to increase leverage and grow future returns.
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Bharatiya Global Infomedia’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. Although, its appropriate level of leverage means investors can be more confident in the sustainability of Bharatiya Global Infomedia’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 Bharatiya Global Infomedia, there are three pertinent factors 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 Bharatiya Global Infomedia’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 Bharatiya Global Infomedia? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!