In This Article:
This analysis is intended to introduce important early concepts to people who are starting to invest and looking to gauge the potential return on investment in Syngene International Limited (NSE:SYNGENE).
Syngene International Limited (NSE:SYNGENE) delivered an ROE of 17.75% over the past 12 months, which is an impressive feat relative to its industry average of 10.81% during the same period. On the surface, this looks fantastic since we know that SYNGENE has made large profits from little equity capital; however, ROE doesn’t tell us if management have borrowed heavily to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether SYNGENE’s ROE is actually sustainable. See our latest analysis for Syngene International
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) weighs Syngene International’s profit against the level of 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
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 Syngene International, which is 13.77%. Since Syngene International’s return covers its cost in excess of 3.98%, its use of equity capital is efficient and likely to be sustainable. Simply put, Syngene International 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
Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. Asset turnover reveals how much revenue can be generated from Syngene International’s asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be inflated by excessive debt, we need to examine Syngene International’s debt-to-equity level. At 38.57%, Syngene International’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.