Yahoo Finance Whitbread PLC (LON:WTB) Delivered A Better ROE Than The Industry, Here’s Why
Whitbread PLC (LSE:WTB) outperformed the Restaurants industry on the basis of its ROE – producing a higher 15.57% relative to the peer average of 10.31% over the past 12 months. While the impressive ratio tells us that WTB has made significant profits from little equity capital, ROE doesn’t tell us if WTB has borrowed debt to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether WTB’s ROE is actually sustainable. View our latest analysis for Whitbread
Breaking down Return on Equity
Return on Equity (ROE) is a measure of Whitbread’s profit relative to its shareholders’ equity. For example, if the company invests £1 in the form of equity, it will generate £0.16 in earnings from this. 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 Whitbread’s equity capital deployed. Its cost of equity is 8.28%. Given a positive discrepancy of 7.29% between return and cost, this indicates that Whitbread 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
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 Whitbread can make from its 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 financial leverage can artificially inflate ROE, we need to look at how much debt Whitbread currently has. At 33.23%, Whitbread’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.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Whitbread’s ROE is impressive relative to the industry average and also covers 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 Whitbread, I’ve put together 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 Whitbread 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 Whitbread is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Whitbread? 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.
