Yahoo Finance Is CTS Eventim AG & Co KGaA’s (ETR:EVD) 28.17% ROE Strong Compared To Its Industry?
I am writing today to help inform people who are new to the stock market and want to learn about Return on Equity using a real-life example.
CTS Eventim AG & Co KGaA (ETR:EVD) outperformed the Movies and Entertainment industry on the basis of its ROE – producing a higher 28.17% relative to the peer average of 14.46% over the past 12 months. Superficially, this looks great since we know that EVD has generated big profits with little equity capital; however, ROE doesn’t tell us how much EVD has borrowed in debt. We’ll take a closer look today at factors like financial leverage to determine whether EVD’s ROE is actually sustainable.
See our latest analysis for CTS Eventim KGaA
Breaking down Return on Equity
Return on Equity (ROE) is a measure of CTS Eventim KGaA’s profit relative to its shareholders’ equity. An ROE of 28.17% implies €0.28 returned on every €1 invested. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of CTS Eventim KGaA’s equity capital deployed. Its cost of equity is 9.03%. Given a positive discrepancy of 19.14% between return and cost, this indicates that CTS Eventim KGaA pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be broken down into three different 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
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 CTS Eventim KGaA 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. Since financial leverage can artificially inflate ROE, we need to look at how much debt CTS Eventim KGaA currently has. At 27.49%, CTS Eventim KGaA’s debt-to-equity ratio appears low and indicates the above-average ROE is generated from its capacity to increase profit without a large debt burden.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. CTS Eventim KGaA’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. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For CTS Eventim KGaA, I’ve put together three important aspects 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.
Valuation: What is CTS Eventim KGaA 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 CTS Eventim KGaA is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of CTS Eventim KGaA? 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
