Can Magellan Aerospace Corporation's (TSE:MAL) ROE Continue To Surpass The Industry Average? – Simply Wall St

With an ROE of 16.03%, Magellan Aerospace Corporation (TSX:MAL) returned in-line to its own industry which delivered 14.74% over the past year. But what is more interesting is whether MAL can sustain this level of return. A measure of sustainable returns is MAL’s financial leverage. If MAL borrows debt to invest in its business, its profits will be higher. But ROE does not capture any debt, so we only see high profits and low equity, which is great on the surface. But today let’s take a deeper dive below this surface. View our latest analysis for Magellan Aerospace

Breaking down ROE — the mother of all ratios

Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. An ROE of 16.03% implies CA$0.16 returned on every CA$1 invested, so the higher the return, the better. If investors diversify their portfolio by industry, they may want to maximise their return in the Aerospace and Defense sector by investing in the highest returning stock. However, this can be deceiving as each company has varying costs of equity and debt levels, which could exaggeratedly push up ROE at the same time as accumulating high interest expense.

Return on Equity = Net Profit ÷ Shareholders Equity

ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for Magellan Aerospace, which is 8.43%. Since Magellan Aerospace’s return covers its cost in excess of 7.60%, its use of equity capital is efficient and likely to be sustainable. Simply put, Magellan Aerospace pays less for its capital than what it generates in return. ROE can

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