Is AVANGARD Joint Stock BANK’s (MCX:AVAN) ROE Of 27.82% Sustainable?

I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in AVANGARD Joint Stock BANK (MCX:AVAN).

With an ROE of 27.82%, AVANGARD Joint Stock BANK (MCX:AVAN) outpaced its own industry which delivered a less exciting 10.43% over the past year. Though, the impressiveness of AVAN’s ROE is contingent on whether this industry-beating level can be sustained. This can be measured by looking at the company’s financial leverage. With more debt, AVAN can invest even more and earn more money, thus pushing up its returns. However, ROE only measures returns against equity, not debt. This can be distorted, so let’s take a look at it further. See our latest analysis for AVANGARD BANK

Breaking down Return on Equity

Return on Equity (ROE) is a measure of AVANGARD BANK’s profit relative to its shareholders’ equity. An ROE of 27.82% implies RUB0.28 returned on every RUB1 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 Diversified Banks sector by choosing 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.

Return on Equity = Net Profit ÷ Shareholders Equity

ROE is measured against cost of equity in order to determine the efficiency of AVANGARD BANK’s equity capital deployed. Its cost of equity is 13.41%. Given a positive discrepancy of 14.41% between return and cost, this indicates that AVANGARD BANK 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:

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

MISX:AVAN Last Perf July 3rd 18
MISX:AVAN Last Perf July 3rd 18

Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover reveals how much revenue can be generated from AVANGARD BANK’s asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. We can assess whether AVANGARD BANK is fuelling ROE by excessively raising debt. Ideally, AVANGARD BANK should have a balanced capital structure, which we can check by looking at the historic debt-to-equity ratio of the company. Currently the ratio stands at 34.68%, which is very low. This means AVANGARD BANK has not taken on leverage, and its above-average ROE is driven by its ability to grow its profit without a huge debt burden.

MISX:AVAN Historical Debt July 3rd 18
MISX:AVAN Historical Debt July 3rd 18

Next Steps:

ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. AVANGARD BANK’s above-industry ROE is encouraging, and is also in excess of 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 AVANGARD BANK, I’ve compiled three fundamental factors 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. Future Earnings: How does AVANGARD BANK’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.
  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of AVANGARD BANK? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!