Will MultiQ International AB (publ) (STO:MULQ) Continue To Underperform Its Industry?

MultiQ International AB (publ)’s (OM:MULQ) most recent return on equity was a substandard 1.71% relative to its industry performance of 10.38% 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 MULQ's past performance. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of MULQ's returns. Check out our latest analysis for MultiQ International

Peeling the layers of ROE – trisecting a company’s profitability

Return on Equity (ROE) weighs MultiQ International’s profit against the level of its shareholders’ equity. An ROE of 1.71% implies SEK0.02 returned on every SEK1 invested, so the higher the return, the better. If investors diversify their portfolio by industry, they may want to maximise their return in the Technology Hardware, Storage and Peripherals 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 measured against cost of equity in order to determine the efficiency of MultiQ International’s equity capital deployed. Its cost of equity is 9.88%. This means MultiQ International’s returns actually do not cover its own cost of equity, with a discrepancy of -8.17%. 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 reveals how much revenue can be generated from MultiQ International’s asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. We can assess whether MultiQ International is fuelling ROE by excessively raising debt. Ideally, MultiQ International should have a balanced capital structure, which we can check by looking at the historic debt-to-equity ratio of the company. Currently, MultiQ International has no debt which means its returns are driven purely by equity capital. This could explain why MultiQ International's' ROE is lower than its industry peers, most of which may have some degree of debt in its business.

Next Steps:

ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. MultiQ International’s below-industry ROE is disappointing, furthermore, its returns were not even high enough to cover its own cost of equity. Although, its appropriate level of leverage means investors can be more confident in the sustainability of MultiQ International’s return with a possible increase should the company decide to increase its debt levels. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.

For MultiQ International, I've put together three key aspects 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 MultiQ International 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 MultiQ International is currently mispriced by the market.
• 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of MultiQ International? 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.