Is Public Joint Stock Company Interregional Distribution Grid Company of Siberia's (MCX:MRKS) 27.83% ROE Strong Compared To Its Industry?

Public Joint Stock Company Interregional Distribution Grid Company of Siberia (MISX:MRKS) outperformed the electric utilities industry on the basis of its ROE – producing a higher 27.83% relative to the peer average of 9.14% over the past 12 months. However, whether this above-industry ROE is actually impressive depends on if it can be maintained. Sustainability can be gauged by a company’s financial leverage – the more debt it has, the higher ROE is pumped up in the short term, at the expense of long term interest payment burden. Let me show you what I mean by this. See our latest analysis for Interregional Distribution Grid Company of Siberia

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. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. If investors diversify their portfolio by industry, they may want to maximise their return in the Electric Utilities sector by investing in 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.

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 Interregional Distribution Grid Company of Siberia, which is 12.23%. This means Interregional Distribution Grid Company of Siberia returns enough to cover its own cost of equity, with a buffer of 15.60%. This sustainable practice implies that the company pays less 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 Interregional Distribution Grid Company of Siberia can generate with its current asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. We can determine if Interregional Distribution Grid Company of Siberia’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 Interregional Distribution Grid Company of Siberia’s debt-to-equity ratio. The ratio currently stands at a high 174.18%, meaning Interregional Distribution Grid Company of Siberia may have taken on a disproportionate level of debt which is driving the high return. The company’s ability to produce profit growth may hinge on its big debt burden.

Next Steps:

While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. Interregional Distribution Grid Company of Siberia’s above-industry ROE is encouraging, and is also in excess of its cost of equity. With debt capital in excess of equity, ROE may be inflated by the use of debt funding, raising questions over the sustainability of the company’s returns. Although ROE can be a useful metric, it is only a small part of diligent research.

For Interregional Distribution Grid Company of Siberia, there are three important aspects you should further research below. Just a heads up - to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.

• 1. Financial Health: Does it have a healthy balance sheet? Take a look at this free balance sheet analysis with six simple checks on key factors like leverage and risk.
• 2. Future Earnings: How does Interregional Distribution Grid Company of Siberia'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 Simply Wall St's free analyst growth expectation chart.
• 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Interregional Distribution Grid Company of Siberia? Explore this interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!