Bunge Limited (NYSE: BG) well underperformed the Consumer Staples sector by -11.5% as it relates to ROE, producing a poor 0.9% compared to the sector’s 12.4%. But what is more interesting is whether Bunge will continue to produce dissapointing returns moving forward. The DuPont analysis is a useful tool that may help us determine this. In my analysis below, I’ll use the DuPont model to reveal what’s really driving the company’s poor ROE.
Bunge’s ROE Trends
Return on equity or ROE represents the percentage return a company generates on the money shareholders have invested.
ROE = Net Income To Common / Average Total Common Equity
In general, a higher return on equity suggests management is utilizing the capital invested by shareholders efficiently. However, it is important to note that ROE can be impacted by management’s financing decisions such as the deployment of leverage.
Bunge’s recent ROE trends are illustrated in the chart below.
source: finbox.io data explorer – ROE
The return on equity of Bunge has generally been declining over the last few years. ROE increased from 10.7% to 11.4% in fiscal year 2016, decreased to 1.9% in 2017 and decreased again to 0.9% as of LTM Mar’18. So what’s causing the general decline?
What’s Causing Bunge’s Declining Return On Equity
A less used approach although being much more intuitive, the DuPont formula is another way to calculate a company’s ROE. It is defined as:
ROE = Net Profit Margin * Asset Turnover * Equity Multiplier
Created by the DuPont Corporation in the 1920s, the analysis is a useful tool that helps determine what’s responsible for changes in a company’s ROE. It highlights that a firm’s ROE is affected by three things: profit margin, asset turnover, and its equity multiplier or financial leverage.
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 what’s causing Bunge’s declining returns.
Bunge’s Net Profit Margin Trends
Unfortunately for shareholders, Bunge’s net profit margin has decreased each year since 2015. Margins decreased from 1.7% to 1.7% in fiscal year 2016, decreased to 0.3% in 2017 and decreased again to 0.1% as of LTM Mar’18.
As a result, the company’s worsening margins help explain, at least in part, why ROE continues to decline. However, let’s also take a look at Bunge’s efficiency.
Bunge’s Asset Turnover Trends
It appears that asset turnover of Bunge has generally been increasing over the last few years. Turnover increased from 2.21x to 2.30x in fiscal year 2016, increased to 2.41x in 2017 and decreased to 2.07x as of LTM Mar’18.
source: data explorer – asset turnover
As a result, the company’s declining ROE is not due to its asset turnover performance which has generally been increasing.
Finally, the DuPont constituents that make up Bunge’s ROE are shown in the table below. Note that the table also compares Bunge to a peer group that includes Archer-Daniels-Midland Company (NYSE: ADM), General Mills, Inc. (NYSE: GIS), Ingredion Incorporated (NYSE: INGR) and J.M. Smucker Company (The) (NYSE: SJM).
source: finbox.io’s DuPont model
In conclusion, the DuPont analysis has helped us better understand that Bunge’s general decline in return on equity is the result of a steadily deteriorating net profit margin, an improving asset turnover ratio and increasing leverage. Therefore when looking at the core operations of the business, Bunge shareholders have reason to be concerned due to the company’s deteriorating profitability along with a general improvement in 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. For example, how do the company’s ROE trends compare to its peers or sector? How about in absolute returns? I recommend that investors continue to research Bunge to gain a better understanding of its fundamentals before making an investment decision.
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.