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Will BayWa Aktiengesellschaft (FRA:BYW) Continue To Underperform Its Industry?

I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in BayWa Aktiengesellschaft (FRA:BYW).

BayWa Aktiengesellschaft’s (FRA:BYW) most recent return on equity was a substandard 2.18% relative to its industry performance of 11.19% 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 BYW’s past performance. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of BYW’s returns. View out our latest analysis for BayWa

What you must know about ROE

Return on Equity (ROE) is a measure of BayWa’s profit relative to its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.

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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 BayWa, which is 18.53%. This means BayWa’s returns actually do not cover its own cost of equity, with a discrepancy of -16.35%. 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:

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

DB:BYW Last Perf June 25th 18
DB:BYW Last Perf June 25th 18

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 shows how much revenue BayWa can generate with its current asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine BayWa’s debt-to-equity level. The debt-to-equity ratio currently stands at a high 185.59%, meaning the below-average ratio is already being driven by a large amount of debt.

DB:BYW Historical Debt June 25th 18
DB:BYW Historical Debt June 25th 18

Next Steps:

ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. BayWa exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. Its concerning leverage level means its ROE is already supported by high debt, raising questions over whether ROE will further decline in the future. Although ROE can be a useful metric, it is only a small part of diligent research.

For BayWa, there are three pertinent factors you should further examine:

  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 BayWa 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 BayWa is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of BayWa? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.