This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Public Joint-stock Company TNS energo Mari El (MCX:MISB)’s return fundamentals and stock market performance.
Public Joint-stock Company TNS energo Mari El (MCX:MISB) outperformed the electric utilities industry on the basis of its ROE – producing a higher 50.73% relative to the peer average of 10.14% over the past 12 months. However, whether this above-industry ROE is actually impressive depends on if it can be maintained. This can be measured by looking at the company’s financial leverage. With more debt, MISB 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. View out our latest analysis for TNS energo Mari El
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) is a measure of TNS energo Mari El’s profit relative to its shareholders’ equity. For example, if the company invests RUB1 in the form of equity, it will generate RUB0.51 in earnings from this. Investors that are diversifying their portfolio based on industry may want to maximise their return in the Electric Utilities sector by choosing 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 TNS energo Mari El has, the higher ROE is pumped up in the short term, at the expense of long term interest payment burden.
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 TNS energo Mari El, which is 13.41%. Since TNS energo Mari El’s return covers its cost in excess of 37.32%, its use of equity capital is efficient and likely to be sustainable. Simply put, TNS energo Mari El pays less for its capital than what it generates in return. ROE can be dissected into three distinct 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. The other component, asset turnover, illustrates how much revenue TNS energo Mari El can make from its asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. We can assess whether TNS energo Mari El is fuelling ROE by excessively raising debt. Ideally, TNS energo Mari El 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 120.01%, which is relatively balanced. This means TNS energo Mari El has not taken on excessive leverage, and its above-average ROE is driven by its ability to grow its profit without a significant debt burden.
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. TNS energo Mari El’s above-industry ROE is encouraging, and is also in excess of its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. Although ROE can be a useful metric, it is only a small part of diligent research.
For TNS energo Mari El, 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.
- Future Earnings: How does TNS energo Mari El’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 TNS energo Mari El? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!