Joint Stock Company “World Trade Center Moscow” (MISX:WTCM) generated a below-average return on equity of 0.44% in the past 12 months, while its industry returned 10.03%. Though WTCM’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 WTCM’s below-average returns. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of WTCM’s returns. Let me show you what I mean by this. View our latest analysis for World Trade Center Moscow
What you must know about ROE
Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. An ROE of 0.44% implies RUB0 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 Real Estate Operating Companies 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
Returns are usually compared to costs to measure the efficiency of capital. World Trade Center Moscow’s cost of equity is 13.41%. This means World Trade Center Moscow’s returns actually do not cover its own cost of equity, with a discrepancy of -12.96%. 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 broken down into three different 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 World Trade Center Moscow’s asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. We can determine if World Trade Center Moscow’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 World Trade Center Moscow’s debt-to-equity ratio. Currently World Trade Center Moscow has virtually no debt, which means its returns are predominantly driven by equity capital. This could explain why World Trade Center Moscow’s’ ROE is lower than its industry peers, most of which may have some degree of debt in its business.
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. World Trade Center Moscow’s ROE is underwhelming relative to the industry average, and its returns were also not strong 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. Although ROE can be a useful metric, it is only a small part of diligent research.
For World Trade Center Moscow, I’ve put together three fundamental 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.
- Valuation: What is World Trade Center Moscow 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 World Trade Center Moscow is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of World Trade Center Moscow? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!