Yahoo Movies Can Altisource Portfolio Solutions SA’s (NASDAQ:ASPS) ROE Continue To Surpass The Industry Average?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and looking to gauge the potential return on investment in Altisource Portfolio Solutions SA (NASDAQ:ASPS).
With an ROE of 94.00%, Altisource Portfolio Solutions SA (NASDAQ:ASPS) outpaced its own industry which delivered a less exciting 10.60% over the past year. On the surface, this looks fantastic since we know that ASPS has made large profits from little equity capital; however, ROE doesn’t tell us if management have borrowed heavily to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable ASPS’s ROE is. View out our latest analysis for Altisource Portfolio Solutions
Breaking down Return on Equity
Return on Equity (ROE) weighs Altisource Portfolio Solutions’s profit against the level of its shareholders’ equity. An ROE of 94.00% implies $0.94 returned on every $1 invested. 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
ROE is measured against cost of equity in order to determine the efficiency of Altisource Portfolio Solutions’s equity capital deployed. Its cost of equity is 9.65%. This means Altisource Portfolio Solutions returns enough to cover its own cost of equity, with a buffer of 84.35%. This sustainable practice implies that the company pays less for its capital than what it generates in return. ROE can be broken down into three different 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 Altisource Portfolio Solutions can generate with its current 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 Altisource Portfolio Solutions’s debt-to-equity level. The debt-to-equity ratio currently stands at a balanced 128.49%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Altisource Portfolio Solutions exhibits a strong ROE against its peers, as well as sufficient returns to cover its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Altisource Portfolio Solutions, I’ve put together three pertinent factors you should further examine:
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.
Valuation: What is Altisource Portfolio Solutions worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Altisource Portfolio Solutions is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Altisource Portfolio Solutions? 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.
