SFL Corporation: A 12% ROE, But At What Cost?

In the world of maritime and offshore asset management, SFL Corporation Ltd. (NYSE:SFL) has carved out a niche for itself. With a Return on Equity (ROE) of 12%, the company appears to be doing well, but a closer look reveals a more complex picture. The ROE, a key measure of how efficiently a company's management is utilizing its capital, suggests that SFL is turning shareholder investments into profits at a respectable rate. However, the devil is in the details, and in SFL's case, those details involve a significant amount of debt.



SFL's ROE of 12% is calculated as follows: 12% = US$131m ÷ US$1.1b (Based on the trailing twelve months to December 2024). This means that for every $1 of its shareholder's investments, the company generates a profit of $0.12. When compared to the average ROE in the Oil and Gas industry classification, which is 14%, SFL's performance is respectable but not outstanding. The company's management efficiency is on par with its peers, but the high debt-to-equity ratio of 2.52 raises concerns about financial risk.

The use of debt can amplify ROE by increasing the amount of capital available for investment without diluting the ownership stake of existing shareholders. For SFL, the ROE is 12.05%, which is calculated as follows:
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Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
12.05% = US$131m ÷ US$1.1b
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This means that for every $1 of its shareholders' investments, the company generates a profit of $0.12. The use of debt can enhance this return because the interest paid on debt is tax-deductible, reducing the company's taxable income and thereby increasing its net profit.

However, the high debt levels also expose SFL to significant financial risks. If the company is unable to generate sufficient cash flows to service its debt, it could face liquidity issues or even default on its obligations. The company's current ratio is 0.38, and its quick ratio is 0.26, both of which are below 1, indicating potential liquidity concerns. Changes in interest rates can also significantly impact the cost of debt, potentially reducing SFL's net profit and ROE. Additionally, the availability of credit can change over time, and if SFL is unable to borrow as easily in the future, it may face challenges in maintaining its current level of operations and growth.



In conclusion, while SFL's ROE of 12% is respectable and comparable to the industry average, the high debt levels suggest that the company's management efficiency might be somewhat compromised by the increased financial risk. Investors should carefully consider these risks and the potential impact on the company's long-term financial health. The use of debt can enhance ROE, but it also exposes the company to significant financial risks. The company's current ratio and quick ratio, both below 1, indicate potential liquidity concerns. Changes in interest rates and the availability of credit can also impact SFL's financial stability. Therefore, while SFL's ROE is respectable, the high debt levels suggest that the company's management efficiency might be somewhat compromised by the increased financial risk. Investors should carefully consider these risks and the potential impact on the company's long-term financial health.