This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek SA (WSE:BML)’s return fundamentals and stock market performance.
BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek SA’s (WSE:BML) most recent return on equity was a substandard 1.80% relative to its industry performance of 17.03% over the past year. BML’s results could indicate a relatively inefficient operation to its peers, and while this may be the case, it is important to understand what ROE is made up of and how it should be interpreted. Knowing these components could change your view on BML’s performance. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of BML’s returns. Let me show you what I mean by this. View out our latest analysis for BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek
Breaking down Return on Equity
Return on Equity (ROE) weighs BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek’s profit against the level of its shareholders’ equity. An ROE of 1.80% implies PLN0.018 returned on every PLN1 invested, so the higher the return, the better. Investors that are diversifying their portfolio based on industry may want to maximise their return in the Biotechnology 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 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 BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek, which is 11.97%. Since BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek’s return does not cover its cost, with a difference of -10.17%, this means its current use of equity is not efficient and not sustainable. Very simply, BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek 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
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover shows how much revenue BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek 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 BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek is fuelling ROE by excessively raising debt. Ideally, BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek should have a balanced capital structure, which we can check by looking at the historic debt-to-equity ratio of the company. The ratio currently stands at a sensible 21.29%, meaning BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek has not taken on excessive debt to drive its returns. The company is able to produce profit growth without a huge debt burden and still has headroom to grow returns to industry average.
While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek’s below-industry ROE is disappointing, furthermore, its returns were not even high enough to cover its own cost of equity. However, ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of returns, which has headroom to increase further. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek, there are three important factors you should look at:
- 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 BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek’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 BIOMED-LUBLIN Wytwórnia Surowic i Szczepionek? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!