Should Investors Be Worried About Intel Corporation’s (NASDAQ: INTC) Declining ROE?

in SHAREHOLDER RETURNS by

Intel Corporation’s (NASDAQ: INTC) most recent return on equity was an outstanding 16.2% in comparison to the Information Technology sector which returned 2.9%. Though Intel’s performance over the past twelve months is highly impressive, it’s useful to understand how the company achieved its strong ROE. Was it a result of profit margins, operating efficiency or maybe even leverage? Knowing these components may change your views on Intel and its future prospects.


ROE Trends Of Intel

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. It is calculated as follows:

ROE = Net Income To Common / Average Total Common Equity

ROE is a helpful metric that illustrates how effective the company is at turning the cash put into the business into gains or returns for investors. But it is important to note that ROE can be impacted by management’s financing decisions such as the deployment of leverage.

The return on equity of Intel is shown below.

Intel's ROE Trends Chart

source: finbox.io data explorer – ROE

The return on equity of Intel has generally been declining over the last few years. ROE decreased from 19.5% to 16.2% in fiscal year 2016, decreased to 14.2% in 2017 and increased to 16.2% as of LTM Mar’18. So what’s causing the general decline?


Intel’s Declining ROE Trends

In addition to the formula previously discussed, there’s actually another way to calculate ROE. It’s often called the DuPont formula and is as follows:

Return on Equity = Net Profit Margin * Asset Turnover * Equity Multiplier

Analyzing changes in these three items over time allows investors to figure out if operating efficiency, asset use efficiency or the use of leverage is what’s causing changes in ROE. Strong companies should have ROE that is increasing because its net profit margin and/or asset turnover is increasing. On the other hand, a company may not be as strong as investors would otherwise think if ROE is increasing from the use of leverage or debt.

So let’s take a closer look at the drivers behind Intel’s returns.

Net Profit Margin

The net profit margin of Intel has generally been declining over the last few years. Margins decreased from 20.6% to 17.4% in fiscal year 2016, decreased to 15.3% in 2017 and increased to 17.3% as of LTM Mar’18.

INTC Net Profit Margin Trends

source: data explorer – net profit margin

Therefore, the company’s decreasing margins help explain, at least partially, why ROE is also decreasing. Now let’s take a look at Intel’s efficiency performance.

Asset Turnover

Unfortunately for shareholders, Intel’s asset turnover has decreased each year since 2015. Turnover decreased from 0.57x to 0.55x in fiscal year 2016, decreased to 0.53x in 2017 and decreased again to 0.52x as of LTM Mar’18.

INTC Asset Turnover Trends

source: data explorer – asset turnover

As a result, the company’s worsening asset turnover ratio helps explain, at least partially, why ROE continues to decline.

Finally, the DuPont constituents that make up Intel’s ROE are shown in the table below. Note that the table also compares Intel to a peer group that includes Microchip Technology Incorporated (NASDAQ: MCHP), MagnaChip Semiconductor Corporation (NYSE: MX), NXP Semiconductors N.V. (NASDAQ: NXPI) and Silicon Motion Technology Corporation (NASDAQ: SIMO).

INTC ROE Breakdown vs Peers Table - DuPont Analysis

source: finbox.io’s DuPont model

In conclusion, the DuPont analysis has helped us better understand that Intel’s general decline in return on equity is the result of a worsening net profit margin, a declining asset turnover ratio and increasing leverage. Therefore when looking at the core operations of the business, Intel shareholders have reason to be concerned due to the company’s general decline in profitability along with deteriorating operational efficiency and increasing leverage.

The DuPont approach is a helpful tool when analyzing how well management is utilizing shareholder capital. However, it doesn’t necessarily tell the whole story. If you have not done so already, I highly recommend that you complete your research on Intel by taking a look at the following:

Valuation Metrics: what is Intel’s EBITDA less CapEx multiple and how does it compare to its peers? This is a helpful multiple to analyze when comparing capital intensive businesses. View the company’s EBITDA less CapEx multiple here.

Risk Metrics: what is Intel’s asset efficiency? This ratio measures the amount of cash flow that a company generates from its assets. View the company’s asset efficiency here.

Efficiency Metrics: is management becoming more or less efficient in creating value for the firm? Find out by analyzing the company’s return on invested capital ratio here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Expertise: Valuation, financial statement analysis. Matt Hogan is also a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock. His work is frequently published at InvestorPlace, Benzinga, ValueWalk, AAII, Barron’s, Seeking Alpha and investing.com. Matt can be reached at matt@finbox.io or at +1 (516) 778-6257.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.