I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on Triveni Turbine Limited (NSE:TRITURBINE) stock.
Triveni Turbine Limited (NSE:TRITURBINE) delivered an ROE of 21.23% over the past 12 months, which is an impressive feat relative to its industry average of 10.44% during the same period. Superficially, this looks great since we know that TRITURBINE has generated big profits with little equity capital; however, ROE doesn’t tell us how much TRITURBINE has borrowed in debt. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable TRITURBINE’s ROE is. View out our latest analysis for Triveni Turbine
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) is a measure of Triveni Turbine’s profit relative to its shareholders’ equity. For example, if the company invests ₹1 in the form of equity, it will generate ₹0.21 in earnings from this. 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 Triveni Turbine’s equity capital deployed. Its cost of equity is 15.05%. Given a positive discrepancy of 6.18% between return and cost, this indicates that Triveni Turbine pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be dissected into three distinct 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 shows how much revenue Triveni Turbine 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 artificially increased through excessive borrowing, we should check Triveni Turbine’s historic debt-to-equity ratio. Currently Triveni Turbine has virtually no debt, which means its returns are predominantly driven by equity capital. Therefore, the level of financial leverage has no impact on ROE, and the ratio is a representative measure of the efficiency of all its capital employed firm-wide.