What is Behind Shreyas Shipping and Logistics Limited’s (NSE:SHREYAS) Superior ROE? – Simply Wall St News
This analysis is intended to introduce important early concepts to people who are starting to invest
and want to learn about Return on Equity using a real-life example.
With an ROE of 21.79%, Shreyas Shipping and Logistics Limited (NSE:SHREYAS) outpaced its own industry which delivered a less exciting 4.24% over the past year.
However, whether this above-industry ROE is actually impressive depends on if it can be maintained.
Sustainability can be gauged by a company’s financial leverage – the more debt it has, the higher ROE is pumped up in the short term, at the expense of long term interest payment burden. Let me show you what I mean by this.
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) weighs Shreyas Shipping and Logistics’s profit against the level of its shareholders’ equity.
For example, if the company invests ₹1 in the form of equity, it will generate ₹0.22 in earnings from this.
If investors diversify their portfolio by industry, they may want to maximise their return in the Marine sector by investing in the highest returning stock.
However, this can be misleading as each firm has different costs of equity and debt levels i.e. the more debt Shreyas Shipping and Logistics has, the higher ROE is pumped up in the short term, at the expense of long term interest payment burden.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of Shreyas Shipping and Logistics’s equity capital deployed. Its cost of equity is 13.55%.
Given a positive discrepancy of 8.24% between return and cost, this indicates that Shreyas Shipping and Logistics pays less for its capital than what it generates in return, which is a sign of capital efficiency.
ROE can be broken down into three different ratios: net profit margin, asset turnover, and financial leverage. This is called the 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 reveals how much revenue can be generated from Shreyas Shipping and Logistics’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.
ROE can be inflated by disproportionately high levels of debt. This is also unsustainable due to the high interest cost that the company will also incur. Thus, we should look at Shreyas Shipping and Logistics’s debt-to-equity ratio to examine sustainability of its returns.
Currently the ratio stands at 62.10%, which is reasonable. This means Shreyas Shipping and Logistics has not taken on too much leverage, and its above-average ROE is driven by its ability to grow its profit without a huge debt burden.
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock.
Shreyas Shipping and Logistics’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.
ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Shreyas Shipping and Logistics,
- 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.
- Future Earnings: How does Shreyas Shipping and Logistics’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Shreyas Shipping and Logistics? 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 past 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. For errors that warrant correction please contact the editor at [email protected]
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