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How Did Borussia Dortmund GmbH & Co Kommanditgesellschaft auf Aktien’s (ETR:BVB) 18.5% ROE Fare Against The Industry?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between company’s fundamentals and stock market performance.

With an ROE of 18.5%, Borussia Dortmund GmbH & Co Kommanditgesellschaft auf Aktien (ETR:BVB) outpaced its own industry which delivered a less exciting 15.5% over the past year. On the surface, this looks fantastic since we know that BVB has made large profits from little equity capital; however, ROE doesn’t tell us if management have borrowed heavily to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether BVB’s ROE is actually sustainable.

View our latest analysis for Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien

Breaking down ROE — the mother of all ratios

Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. An ROE of 18.5% implies €0.19 returned on every €1 invested. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.

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Return on Equity = Net Profit ÷ Shareholders Equity

Returns are usually compared to costs to measure the efficiency of capital. Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien’s cost of equity is 8.1%. This means Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien returns enough to cover its own cost of equity, with a buffer of 10.4%. 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:

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

XTRA:BVB Last Perf September 28th 18
XTRA:BVB Last Perf September 28th 18

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. The other component, asset turnover, illustrates how much revenue Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien can make from its asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since financial leverage can artificially inflate ROE, we need to look at how much debt Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien currently has. At 2.5%, Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien’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.

XTRA:BVB Historical Debt September 28th 18
XTRA:BVB Historical Debt September 28th 18

Next Steps:

ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien exhibits a strong ROE against its peers, as well as sufficient returns to cover 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. Although ROE can be a useful metric, it is only a small part of diligent research.

For Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien, I’ve compiled 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 Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien 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 Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien? 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.