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Control4 Corporation (NASDAQ:CTRL): Can It Deliver A Superior ROE To The Industry?

Control4 Corporation (NASDAQ:CTRL) delivered a less impressive 9.56% ROE over the past year, compared to the 10.49% return generated by its industry. An investor may attribute an inferior ROE to a relatively inefficient performance, and whilst this can often be the case, knowing the nuts and bolts of the ROE calculation may change that perspective and give you a deeper insight into CTRL’s past performance. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of CTRL’s returns. See our latest analysis for Control4

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. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.

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 Control4, which is 9.28%. Control4’s ROE exceeds its cost by 0.28%, which is a big tick. Some of its peers with higher ROE may face a cost which exceeds returns, which is unsustainable and far less desirable than Control4’s case of positive discrepancy. ROE can be dissected into three distinct 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

NasdaqGS:CTRL Last Perf Dec 17th 17
NasdaqGS:CTRL Last Perf Dec 17th 17

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 Control4 can generate with its current asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since ROE can be artificially increased through excessive borrowing, we should check Control4’s historic debt-to-equity ratio. Currently, Control4 has no debt which means its returns are driven purely by equity capital. This could explain why Control4’s’ ROE is lower than its industry peers, most of which may have some degree of debt in its business.

NasdaqGS:CTRL Historical Debt Dec 17th 17
NasdaqGS:CTRL Historical Debt Dec 17th 17

What this means for you:

Are you a shareholder? While CTRL exhibits a weak ROE against its peers, its returns are sufficient enough to cover its cost of equity, which means its generating value for shareholders. Since ROE is not inflated by excessive debt, it might be a good time to add more of CTRL to your portfolio if your personal research is confirming what the ROE is telling you. If you’re looking for new ideas for high-returning stocks, you should take a look at our free platform to see the list of stocks with Return on Equity over 20%.

Are you a potential investor? If you are considering investing in CTRL, looking at ROE on its own is not enough to make a well-informed decision. I recommend you do additional fundamental analysis by looking through our most recent infographic report on Control4 to help you make a more informed investment decision.


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.

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