Is Firstsource Solutions Limited's (NSE:FSL) 14.9% ROE Strong Compared To Its Industry?
This article is intended for those of you who are at the beginning of your investing journey and want to learn about Return on Equity using a real-life example.
With an ROE of 14.9%, Firstsource Solutions Limited (NSE:FSL) outpaced its own industry which delivered a less exciting 12.7% over the past year. While the impressive ratio tells us that FSL has made significant profits from little equity capital, ROE doesn't tell us if FSL has borrowed debt to make this happen. In this article, we'll closely examine some factors like financial leverage to evaluate the sustainability of FSL's ROE.
Firstly, Return on Equity, or ROE, is simply the percentage of last years' earning against the book value of shareholders' equity. An ROE of 14.9% implies ₹0.15 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.
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover reveals how much revenue can be generated from Firstsource Solutions'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 Firstsource Solutions currently has. At 34.8%, Firstsource Solutions's debt-to-equity ratio appears low and indicates the above-average ROE is generated from its capacity to increase profit without a large debt burden.
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Firstsource Solutions's above-industry ROE is encouraging, and is also in excess of its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
Valuation: What is Firstsource 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 Firstsource Solutions is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Firstsource 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!