Sasseur Real Estate Investment Trust (SGX:CRPU) generated a below-average return on equity of 6.47% in the past 12 months, while its industry returned 7.25%. CRPU’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 CRPU’s performance. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of CRPU’s returns. Check out our latest analysis for Sasseur Real Estate Investment Trust
Breaking down Return on Equity
Return on Equity (ROE) is a measure of Sasseur Real Estate Investment Trust’s profit relative to its 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.
Return on Equity = Net Profit ÷ Shareholders Equity
Returns are usually compared to costs to measure the efficiency of capital. Sasseur Real Estate Investment Trust’s cost of equity is 8.38%. This means Sasseur Real Estate Investment Trust’s returns actually do not cover its own cost of equity, with a discrepancy of -1.90%. This isn’t sustainable as it implies, very simply, that the company pays more for its capital than what it generates in return. ROE can be broken down into three different 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. The other component, asset turnover, illustrates how much revenue Sasseur Real Estate Investment Trust can make from its 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 financial leverage can artificially inflate ROE, we need to look at how much debt Sasseur Real Estate Investment Trust currently has. Currently the debt-to-equity ratio stands at a reasonable 57.98%, which means its ROE is driven by its ability to grow its profit without a significant debt burden.