With An ROE Of 7.75%, Has Public joint-stock commercial bank Primorye's (MCX:PRMB) Management Done Well?

With an ROE of 7.75%, Public joint-stock commercial bank Primorye (MISX:PRMB) returned in-line to its own industry which delivered 10.56% over the past year. But what is more interesting is whether PRMB can sustain or improve on this level of return. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of PRMB's returns. Let me show you what I mean by this. See our latest analysis for commercial bank Primorye

Breaking down Return on Equity

Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. For example, if the company invests RUB1 in the form of equity, it will generate RUB0.08 in earnings from this. Investors seeking to maximise their return in the Diversified Banks 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 commercial bank Primorye has, the higher ROE is pumped up in the short term, at the expense of long term interest payment burden.

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 commercial bank Primorye, which is 13.41%. Since commercial bank Primorye’s return does not cover its cost, with a difference of -5.66%, this means its current use of equity is not efficient and not sustainable. Very simply, commercial bank Primorye 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:

Essentially, profit margin shows how much money the company makes after paying for all its expenses. The other component, asset turnover, illustrates how much revenue commercial bank Primorye can make from its asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. We can determine if commercial bank Primorye’s ROE is inflated by borrowing high levels of debt. Generally, a balanced capital structure means its returns will be sustainable over the long run. We can examine this by looking at commercial bank Primorye’s debt-to-equity ratio. The most recent ratio is 1.05%, which is sensible and indicates commercial bank Primorye has not taken on too much leverage. Thus, we can conclude its below-average ROE may be a result of low debt, and commercial bank Primorye still has room to increase leverage and grow future returns.

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. commercial bank Primorye exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. 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 commercial bank Primorye, I've compiled three relevant factors you should look at:

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.