Yahoo Finance Should You Expect Next Fifteen Communications Group plc (LON:NFC) To Continue Delivering An ROE Of 12.18%?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Next Fifteen Communications Group plc (LON:NFC)’s return fundamentals and stock market performance.
Next Fifteen Communications Group plc (LON:NFC) outperformed the Advertising industry on the basis of its ROE – producing a higher 12.18% relative to the peer average of 9.95% over the past 12 months. While the impressive ratio tells us that NFC has made significant profits from little equity capital, ROE doesn’t tell us if NFC has borrowed debt to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether NFC’s ROE is actually sustainable. Check out our latest analysis for Next Fifteen Communications Group
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) weighs Next Fifteen Communications Group’s profit against the level of its shareholders’ equity. For example, if the company invests £1 in the form of equity, it will generate £0.12 in earnings from this. 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
Returns are usually compared to costs to measure the efficiency of capital. Next Fifteen Communications Group’s cost of equity is 8.28%. Given a positive discrepancy of 3.90% between return and cost, this indicates that Next Fifteen Communications Group pays less for its capital than what it generates in return, which is a sign of capital efficiency. 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
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover reveals how much revenue can be generated from Next Fifteen Communications Group’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. Since ROE can be artificially increased through excessive borrowing, we should check Next Fifteen Communications Group’s historic debt-to-equity ratio. The debt-to-equity ratio currently stands at a low 47.01%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Next Fifteen Communications Group 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 Next Fifteen Communications Group, there are three relevant 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 Next Fifteen Communications Group 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 Next Fifteen Communications Group is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Next Fifteen Communications Group? 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.
