For those that are unfamiliar with it, Bio Planet SA is a food distributing company. In this article we are focused on telling you all about the company but we will be mainly focused on its ROE. What is ROE? ROE means the Return on Equity and it is meant to show how profitable a company is by showing its profits in relation with the money that investors have given. It is a very reliable tool to assess the progress or the current situation of any given country but, sometimes, it can also show surprising results.
Let’s talk about ROE
The company had a 9.85 percent ROE last year which is significantly lower than the average 11.98 percent that was measured.
Further analysis of ROE
As we have said before, ROE is a measurement that calculates the earning that a company had in the span of 12 months against what the shareholders have invested. Were we to turn this into a mathematical equation, it would be pretty easy for anyone to use it properly. The company’s 9.85 percent ROE implies that PLN0.1 was returned to ever PLN1 that was invested. This is not as bad as it may seem. If investors are working to make a profit out of investing in the food distribution sector, they should choose companies that have the highest returning stock out there on the market.
However, this also raises a couple of questions, since ROE is not always the most reliable tool out there and companies may show high low term ROE even if they may be suffering from long-term debt.
Let’s just break it all down
If we previously said that ROE is calculated by referring to the cost of equity, we are now going to see how that is calculated as well. This equity is calculated by using the Capital Asset Pricing Model, for short the CAPM, however talking about this would be a whole different story that would take some time.
What we wanted to say was that if other companies have a higher ROE it may mean that they also have higher equity levels. What investors never want to see is returns exceeding all costs. This does not seem to be applicable to Bio Planet, which is more than encouraging to hear.
ROE can be analyzed by referring to three different ratios. We can talk about the asset turnover, the net profit margin or the net profit margin, what is now known as the Dupont formula.
Asset Turnover refers to how much money a company can make from its asset base.
The profit margin
This looks at how many was kept by the company after every other expense was paid for.
This simply means the amount of money that is given by equity, a factor that shows the sustainability of a company’s capital structure.
The company’s deconstructed ROE
If we apply these three variables to Bio Planet we can see that it has a balanced capital structure, with the ratio currently standing at 86.39 percent. What does this mean? Well, it looks like the company is able to grow its profits without having a big debt level, which is a very good thing.
Despite the company having a smaller ROE that other companies that operate in the food distribution industry, everything is in check. The company’s returns are able to cover equity. For future investors the company’s ROE is a sign that the company is a profitable investment option. However, one is always encouraged to look up on more data about a company if they are going to make a long term decision since there is always more to find out.