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What You Must Know About Luxoft Holding Inc’s (NYSE:LXFT) Return on Equity

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 Luxoft Holding Inc (NYSE:LXFT).

Luxoft Holding Inc (NYSE:LXFT) generated a below-average return on equity of 12.13% in the past 12 months, while its industry returned 15.08%. LXFT’s results could indicate a relatively inefficient operation to its peers, and while this may be the case, it is important to understand what ROE is made up of and how it should be interpreted. Knowing these components could change your view on LXFT’s performance. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of LXFT’s returns. Check out our latest analysis for Luxoft Holding

Breaking down Return on Equity

Return on Equity (ROE) weighs Luxoft Holding’s profit against the level of its shareholders’ equity. An ROE of 12.13% implies $0.12 returned on every $1 invested. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.

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Return on Equity = Net Profit ÷ Shareholders Equity

ROE is measured against cost of equity in order to determine the efficiency of Luxoft Holding’s equity capital deployed. Its cost of equity is 9.31%. Some of Luxoft Holding’s peers may have a higher ROE but its cost of equity could exceed this return, leading to an unsustainable negative discrepancy i.e. the company spends more than it earns. This is not the case for Luxoft Holding which is reassuring. 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

NYSE:LXFT Last Perf June 22nd 18
NYSE:LXFT Last Perf June 22nd 18

Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover shows how much revenue Luxoft Holding can generate with its current 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 Luxoft Holding currently has. Currently Luxoft Holding has virtually no debt, which means its returns are predominantly driven by equity capital. This could explain why Luxoft Holding’s’ ROE is lower than its industry peers, most of which may have some degree of debt in its business.

NYSE:LXFT Historical Debt June 22nd 18
NYSE:LXFT Historical Debt June 22nd 18

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Even though Luxoft Holding returned below the industry average, its ROE comes in excess of its cost of equity. Its appropriate level of leverage means investors can be more confident in the sustainability of Luxoft Holding’s return with a possible increase should the company decide to increase its debt levels. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.

For Luxoft Holding, I’ve compiled three key factors you should further research:

  1. 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.

  2. Valuation: What is Luxoft Holding 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 Luxoft Holding is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Luxoft Holding? 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.