Yahoo Finance Is Polymetal International Plc’s (LON:POLY) 27.08% ROE Strong Compared To Its Industry?
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 Polymetal International Plc (LON:POLY)’s return fundamentals and stock market performance.
Polymetal International Plc (LON:POLY) delivered an ROE of 27.08% over the past 12 months, which is an impressive feat relative to its industry average of 10.94% during the same period. Superficially, this looks great since we know that POLY has generated big profits with little equity capital; however, ROE doesn’t tell us how much POLY has borrowed in debt. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of POLY’s ROE. View out our latest analysis for Polymetal International
What you must know about ROE
Return on Equity (ROE) weighs Polymetal International’s profit against the level of its shareholders’ equity. An ROE of 27.08% implies £0.27 returned on every £1 invested. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.
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 Polymetal International, which is 11.44%. This means Polymetal International returns enough to cover its own cost of equity, with a buffer of 15.64%. This sustainable practice implies that the company pays less 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
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover shows how much revenue Polymetal International 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 Polymetal International’s debt-to-equity level. The debt-to-equity ratio currently stands at a balanced 111.40%, 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. Polymetal International’s above-industry ROE is encouraging, and is also in excess of its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. Although ROE can be a useful metric, it is only a small part of diligent research.
For Polymetal International, I’ve compiled three key factors you should further examine:
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 Polymetal International 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 Polymetal International is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Polymetal International? 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.
