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 Quick Heal Technologies Limited (NSE:QUICKHEAL)’s return fundamentals and stock market performance.
Quick Heal Technologies Limited (NSE:QUICKHEAL) generated a below-average return on equity of 11.47% in the past 12 months, while its industry returned 11.52%. An investor may attribute an inferior ROE to a relatively inefficient performance, and whilst this can often be the case, knowing the nuts and bolts of the ROE calculation may change that perspective and give you a deeper insight into QUICKHEAL’s past performance. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of QUICKHEAL’s returns. Let me show you what I mean by this. See our latest analysis for Quick Heal Technologies
Breaking down Return on Equity
Return on Equity (ROE) is a measure of Quick Heal Technologies’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. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
Returns are usually compared to costs to measure the efficiency of capital. Quick Heal Technologies’s cost of equity is 13.55%. Since Quick Heal Technologies’s return does not cover its cost, with a difference of -2.08%, this means its current use of equity is not efficient and not sustainable. Very simply, Quick Heal Technologies 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
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover reveals how much revenue can be generated from Quick Heal Technologies’s 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 Quick Heal Technologies currently has. Currently, Quick Heal Technologies has no debt which means its returns are driven purely by equity capital. This could explain why Quick Heal Technologies’s’ ROE is lower than its industry peers, most of which may have some degree of debt in its business.