Source: Alex Lavoie
Understanding Capital Efficiency in the Banking Sector
Within the financial sector, the Return on Invested Capital (ROIC) and Weighted Average Cost of Capital (WACC) are two critical indicators that investors use to assess a company’s capital efficiency. These metrics provide valuable insight into how effectively a company utilizes its capital to generate returns. In this context, we will examine the performance of CF Bankshares Inc. (NASDAQ:CFBK) and its competitors in the banking industry.
CFBK’s Performance Reveals Capital Inefficiencies
CFBK is a financial institution that offers various banking services. It operates in a highly competitive landscape, with counterparts such as Citizens Community Bancorp, Inc. (CZWI), Colony Bankcorp, Inc. (CBAN), Community West Bancshares (CWBC), Citizens Holding Company (CIZN), and C&F Financial Corporation (CFFI).
CFBK’s ROIC stands at -1.19%, which is significantly below its WACC of 24.98%. This negative ROIC is indicative of the fact that CFBK is not generating sufficient returns to cover its cost of capital. This points to potential inefficiencies in the company’s capital utilization. The ROIC to WACC ratio of -0.048 further underscores this issue, suggesting that the company is not effectively deploying its capital to derive returns.
Comparative Performance of Peers
When compared to its peers, Citizens Community Bancorp, Inc. (NASDAQ:CZWI) has a ROIC of 0.80% and a WACC of 18.82%, which results in a ROIC to WACC ratio of 0.042. While CZWI’s ratio is in positive territory, it is still relatively low, indicating inefficiencies in the use of capital.
Colony Bankcorp, Inc. (NASDAQ:CBAN) also exhibits similar inefficiencies, with a negative ROIC of -0.63% and a WACC of 12.69%. Its ROIC to WACC ratio stands at -0.050, mirroring the capital inefficiencies we see with CFBK.
Capital Efficiency Leaders in the Industry
In contrast, Community West Bancshares (CWBC) and C&F Financial Corporation (NASDAQ:CFFI) demonstrate superior capital efficiency. CWBC has a ROIC of 4.54% and a WACC of 11.57%, resulting in a ROIC to WACC ratio of 0.392. This suggests that CWBC is more efficient in using its capital to generate returns.
However, the standout performer in this group is C&F Financial Corporation. It achieves a ROIC of 6.28% and a WACC of 13.55%, leading to the highest ROIC to WACC ratio of 0.463 among the peers. This demonstrates that CFFI is the most efficient in generating returns relative to its cost of capital.
Conclusion: The Importance of Capital Efficiency
In conclusion, while it’s important to note that ROIC and WACC are not the only metrics to assess a company’s performance, they serve as valuable indicators of how effectively a company is using its capital to generate returns. In the case of CFBK, the negative ROIC and high WACC suggest potential areas for improvement in capital efficiency. On the other hand, companies like CFFI, with a higher ROIC to WACC ratio, are examples of effective capital utilization, providing a model for others in the industry to emulate.