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What You Must Know About Millennium & Copthorne Hotels New Zealand Limited’s (NZSE:MCK) Return on Equity

I am writing today to help inform people who are new to the stock market and want to begin learning the link between Millennium & Copthorne Hotels New Zealand Limited (NZSE:MCK)’s return fundamentals and stock market performance.

Millennium & Copthorne Hotels New Zealand Limited (NZSE:MCK) delivered a less impressive 8.30% ROE over the past year, compared to the 11.40% return generated by its industry. MCK’s results could indicate a relatively inefficient operation to its peers, and while this may be the case, it is important to understand what ROE is made up of and how it should be interpreted. Knowing these components could change your view on MCK’s performance. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of MCK’s returns. View out our latest analysis for Millennium & Copthorne Hotels New Zealand

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. 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 Millennium & Copthorne Hotels New Zealand, which is 9.01%. Since Millennium & Copthorne Hotels New Zealand’s return does not cover its cost, with a difference of -0.71%, this means its current use of equity is not efficient and not sustainable. Very simply, Millennium & Copthorne Hotels New Zealand pays more for its capital than what it generates in return. ROE can be dissected into three distinct 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

NZSE:MCK Last Perf June 27th 18
NZSE:MCK Last Perf June 27th 18

Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover shows how much revenue Millennium & Copthorne Hotels New Zealand 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 ROE can be inflated by excessive debt, we need to examine Millennium & Copthorne Hotels New Zealand’s debt-to-equity level. At 9.94%, Millennium & Copthorne Hotels New Zealand’s debt-to-equity ratio appears low and indicates that Millennium & Copthorne Hotels New Zealand still has room to increase leverage and grow its profits.

NZSE:MCK Historical Debt June 27th 18
NZSE:MCK Historical Debt June 27th 18

Next Steps:

ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Millennium & Copthorne Hotels New Zealand exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. 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. Although ROE can be a useful metric, it is only a small part of diligent research.

For Millennium & Copthorne Hotels New Zealand, I’ve compiled three fundamental aspects 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 Millennium & Copthorne Hotels New Zealand 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 Millennium & Copthorne Hotels New Zealand is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Millennium & Copthorne Hotels New Zealand? 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.