The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want a simplistic look at the return on Sino-Global Shipping America Ltd (NASDAQ:SINO) stock.
With an ROE of 11.33%, Sino-Global Shipping America Ltd (NASDAQ:SINO) returned in-line to its own industry which delivered 11.43% over the past year. But what is more interesting is whether SINO can sustain or improve on this level of return. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of SINO’s returns. Check out our latest analysis for Sino-Global Shipping America
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of Sino-Global Shipping America’s profit relative to its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.11 in earnings from this. Investors seeking to maximise their return in the Marine Ports and Services industry may want to choose 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. Sino-Global Shipping America’s cost of equity is 8.59%. Some of Sino-Global Shipping America’s peers may have a higher ROE but its cost of equity could exceed this return, leading to an unsustainable negative discrepancy i.e. the company spends more than it earns. This is not the case for Sino-Global Shipping America which is reassuring. 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
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover reveals how much revenue can be generated from Sino-Global Shipping America’s 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 assess whether Sino-Global Shipping America is fuelling ROE by excessively raising debt. Ideally, Sino-Global Shipping America should have a balanced capital structure, which we can check by looking at the historic debt-to-equity ratio of the company. Currently, Sino-Global Shipping America has no debt which means its returns are driven purely by equity capital. This could explain why Sino-Global Shipping America’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. Although Sino-Global Shipping America’s ROE is underwhelming relative to the industry average, its returns are high enough to cover the cost of equity. Its appropriate level of leverage means investors can be more confident in the sustainability of Sino-Global Shipping America’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 Sino-Global Shipping America, I’ve compiled three fundamental factors you should further research:
- 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 Sino-Global Shipping America’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 Sino-Global Shipping America? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!