Despite posting a consistent decline in return on average equity since the 2016 recession, Custodian Investment has seen its share price jump by 46.34% between 2016 and 2019 as investors have continued to ignore the decline in return on average equity yields over the years.
Custodian Investment during the periods under review saw its return on average equity tumble almost 50 percent from 26.05% in 2016 to 13.94% in 2019. The steady decline in ROAE can be explained by high management expense and lower profitability recorded within the period.
The company’s topline on the other hand has continued to grow strongly over the last 4 years. Between 2016 and 2019, the financial services company saw its revenue grow by almost 60 percent from N38.55 billion reported in 2016 to a record revenue earnings of N61.41 billion in 2019.
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Although revenue is up nearly 60 percent since 2016, the profit after tax of the firm is actually down about 12.8 percent as Custodian reported a net profit of N6.01 billion in 2019, which is lower than it achieved in 2016 when it reported a net profit of N5.3 billion.
In the same manner, Custodian has also seen a decline in its return on average assets over the same period. The company’s ROAA declined from 11.66 percent in 2016 to 5.56 percent in 2019, representing a drop of more than 50 percent. The sharp drop in ROAA was largely driven by the 73.31 percent growth in company assets and the small drop in company profitability.
The rapid growth in assets was driven by the astronomical increase in the firm’s financial assets in its total assets books which moved from contributing as little as 0.15% to total assets in 2015 to contributing almost 70% in 2019. Financial Assets jumped almost 1000 folds from N88m in 2015 to N81.1 billion in 2019.
Analysts believe that the persistent growth in the company’s gross revenue is linked to the sharp growth in assets recorded in the company over the period although the company’s asset turnover has not been quite impressive lately. The company’s asset turnover has dropped from 0.57 in 2016 to 0.52 in 2019.
It appears investors are only focused on improvements in total assets and revenue growth as the company’s share price has continued to rally over the years, moving from N4.10 in 2016 to N6.00 in 2019. The recent market selloff has forced the share price lower to N5.50 as at market close on Friday.
