Yahoo Finance How Did YouGov plc’s (LON:YOU) 6.84% ROE Fare Against The Industry?
I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on YouGov plc (LON:YOU) stock.
YouGov plc (LON:YOU) generated a below-average return on equity of 6.84% in the past 12 months, while its industry returned 9.95%. Though YOU’s recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on YOU’s below-average returns. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of YOU’s returns. Let me show you what I mean by this. Check out our latest analysis for YouGov
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of YouGov’s profit relative to its shareholders’ equity. An ROE of 6.84% implies £0.068 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.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of YouGov’s equity capital deployed. Its cost of equity is 8.28%. This means YouGov’s returns actually do not cover its own cost of equity, with a discrepancy of -1.44%. 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
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 YouGov 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 YouGov’s debt-to-equity level. Currently, YouGov has no debt which means its returns are driven purely by equity capital. This could explain why YouGov’s’ ROE is lower than its industry peers, most of which may have some degree of debt in its business.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. YouGov’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. However, ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of returns, which has headroom to increase further. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For YouGov, there are three pertinent factors 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 YouGov 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 YouGov is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of YouGov? 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.
