Did Public Joint Stock Company Pavlovo Bus (MCX:PAZA) Create Value For Investors Over The Past Year?

Public Joint Stock Company Pavlovo Bus’s (MISX:PAZA) most recent return on equity was a substandard 5.32% relative to its industry performance of 10.75% over the past year. An investor may attribute an inferior ROE to a relatively inefficient performance, and whilst this can often be the case, knowing the nuts and bolts of the ROE calculation may change that perspective and give you a deeper insight into PAZA's past performance. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of PAZA's returns. Let me show you what I mean by this. View our latest analysis for Pavlovo Bus

Breaking down Return on Equity

Return on Equity (ROE) is a measure of Pavlovo Bus’s profit relative to its shareholders’ equity. For example, if the company invests RUB1 in the form of equity, it will generate RUB0.05 in earnings from this. Investors that are diversifying their portfolio based on industry may want to maximise their return in the Construction Machinery and Heavy Trucks 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.

Returns are usually compared to costs to measure the efficiency of capital. Pavlovo Bus’s cost of equity is 13.50%. This means Pavlovo Bus’s returns actually do not cover its own cost of equity, with a discrepancy of -8.18%. 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:

The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover shows how much revenue Pavlovo Bus can generate with its current 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 Pavlovo Bus’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 Pavlovo Bus’s debt-to-equity ratio. The most recent ratio is 133.46%, which is relatively proportionate and indicates Pavlovo Bus has not taken on extreme leverage. Thus, we can conclude its current ROE is generated from its capacity to increase profit without a massive debt burden.

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Pavlovo Bus 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 Pavlovo Bus, there are three essential 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. Valuation: What is Pavlovo Bus 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 Pavlovo Bus is currently mispriced by the market.
• 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Pavlovo Bus? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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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.