The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Marathon Nextgen Realty Limited (NSE:MARATHON)’s return fundamentals and stock market performance.

Marathon Nextgen Realty Limited (NSE:MARATHON) delivered an ROE of 7.05% over the past 12 months, which is an impressive feat relative to its industry average of 3.86% during the same period. Superficially, this looks great since we know that MARATHON has generated big profits with little equity capital; however, ROE doesn’t tell us how much MARATHON has borrowed in debt. We’ll take a closer look today at factors like financial leverage to determine whether MARATHON’s ROE is actually sustainable. See our latest analysis for Marathon Nextgen Realty

Peeling the layers of ROE – trisecting a company’s profitability

Return on Equity (ROE) is a measure of Marathon Nextgen Realty’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

ROE is measured against cost of equity in order to determine the efficiency of Marathon Nextgen Realty’s equity capital deployed. Its cost of equity is 13.86%. This means Marathon Nextgen Realty’s returns actually do not cover its own cost of equity, with a discrepancy of -6.81%. 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 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 Marathon Nextgen Realty 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 ROE can be artificially increased through excessive borrowing, we should check Marathon Nextgen Realty’s historic debt-to-equity ratio. Currently the debt-to-equity ratio stands at a low 21.21%, which means its above-average ROE is driven by its ability to grow its profit without a significant debt burden.

Next Steps:

While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. Marathon Nextgen Realty’s ROE is impressive relative to the industry average, though its returns were not strong enough to cover its own cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of industry-beating returns. Although ROE can be a useful metric, it is only a small part of diligent research.

For Marathon Nextgen Realty, there are three important aspects you should further examine:

1. 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.

2. Future Earnings: How does Marathon Nextgen Realty’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.

3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Marathon Nextgen Realty? 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.