How Did China Maple Leaf Educational Systems Limited’s (HKG:1317) 13.78% ROE Fare Against The Industry?
With an ROE of 13.78%, China Maple Leaf Educational Systems Limited (SEHK:1317) outpaced its own industry which delivered a less exciting 13.11% over the past year. Superficially, this looks great since we know that 1317 has generated big profits with little equity capital; however, ROE doesn’t tell us how much 1317 has borrowed in debt. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of 1317’s ROE. Check out our latest analysis for China Maple Leaf Educational Systems
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) weighs China Maple Leaf Educational Systems’s profit against the level of its shareholders’ equity. For example, if the company invests HK$1 in the form of equity, it will generate HK$0.14 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 China Maple Leaf Educational Systems’s equity capital deployed. Its cost of equity is 13.74%. This means China Maple Leaf Educational Systems returns enough to cover its own cost of equity, with a buffer of 0.039%. This sustainable practice implies that the company pays less for its capital than what it generates in return. 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 shows how much revenue China Maple Leaf Educational Systems 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 China Maple Leaf Educational Systems’s debt-to-equity level. At 12.04%, China Maple Leaf Educational Systems’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. China Maple Leaf Educational Systems 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 China Maple Leaf Educational Systems, I’ve put together three relevant factors 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 China Maple Leaf Educational Systems 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 China Maple Leaf Educational Systems is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of China Maple Leaf Educational Systems? 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.