Energy Action Limited's 25% ROE: A Cause for Celebration or Caution?

Energy Action Limited (ASX:EAX) has been making waves in the energy sector, with its recent Return on Equity (ROE) of 25% catching the attention of investors. But should we be delighted with this impressive figure, or is there more to the story? Let's dive in and find out.

First, let's put Energy Action's ROE into perspective. The company's historical performance has been volatile, with ROE ranging from -27% to 16% in the past five years. In comparison, the Industrials sector has an average ROE of around 10% to 15%. So, Energy Action's current ROE of 25% is indeed a significant improvement.

Now, let's explore the factors contributing to this high ROE:

1. Improved Profitability: Energy Action's net income has increased significantly, with a net income of AU$0.58 per share in the most recent period, compared to losses in previous years. This improvement in profitability is a major driver of the high ROE.
2. Reduced Leverage: The company has reduced its debt levels, leading to a decrease in interest expenses. This reduction in leverage has positively impacted Energy Action's ROE.
3. Increased Revenue: Energy Action has experienced an increase in revenue, with revenue growth of 8.10% in the most recent period, compared to negative growth in previous years. This increase in revenue has contributed to the company's improved profitability and high ROE.
4. Efficient Cost Management: Energy Action has effectively managed its operating expenses, leading to an improvement in operating margin. The company's operating margin has increased to 6.24% in the most recent period, compared to negative margins in previous years.



However, it's essential to consider the risks and challenges associated with Energy Action's current financial position:

1. Liquidity Risk: Energy Action's shares are highly illiquid, which can make it difficult for investors to enter or exit positions without affecting the share price.
2. Small Market Cap: The company has a small market capitalization (A$11M), which can make it more susceptible to market fluctuations and less attractive to institutional investors.
3. Interest Coverage: Although Energy Action has reduced its debt levels, its interest coverage ratio is not well covered by earnings. This means that if the company were to take on more debt, it might struggle to meet its interest payments.
4. Large One-off Items: The company's financial results have been impacted by large one-off items, which can make it difficult to assess the company's underlying performance.

In conclusion, Energy Action Limited's 25% ROE is a significant improvement compared to its historical performance and the industry average. The company's improved profitability, reduced leverage, increased revenue, and efficient cost management have all contributed to this impressive figure. However, investors should be cautious and consider the risks associated with the company's liquidity, small market cap, interest coverage, and one-off items in its financial results. As always, it's essential to conduct thorough research and consider seeking professional advice before making any investment decisions.

So, should we be delighted with Energy Action Limited's 2025% ROE? The answer is yes, but with a healthy dose of caution and thorough analysis.