Is Carbonite, Inc. (NASDAQ: CARB) Management Utilizing Shareholder’s Equity Efficiently?


Carbonite, Inc. (NASDAQ: CARB) delivered a below average 0.9% ROE over the past year, compared to the 3.0% return generated by the Information Technology sector. Carbonite’s results may indicate management is running an inefficient business relative to its peers, which may very well be the case, but it is important to understand what ROE is made up of and how it should be interpreted. Knowing these components may change your view on Carbonite’s performance and future prospects. I show you exactly what I mean in my DuPont analysis below.

How To Calculate Carbonite’s ROE

Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. Return on Equity or ROE is generally calculated using the following formula:

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. However, it is important to note that ROE can be “manufactured” by management with the use of leverage or debt.

The return on equity achieved by Carbonite over the last few years is shown below.

Carbonite's ROE Trends Chart

source: data explorer – ROE

A promising sign for shareholders, Carbonite’s return on equity has increased each year since 2015. ROE increased from -276.9% to -118.7% in fiscal year 2016, increased to -18.2% in 2017 and increased again to 0.9% as of LTM Mar’18. So what’s causing the steady improvement?

Understanding Carbonite’s Improving Return On Equity

The DuPont analysis is another way to calculate a company’s ROE using the following three metrics:

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 what exactly is causing Carbonite’s improving returns?

Net Profit Margin Trends

A promising sign for shareholders, Carbonite’s net profit margin has increased each year since 2015. Margins increased from -15.8% to -2.0% in fiscal year 2016, increased to -1.7% in 2017 and increased again to 0.1% as of LTM Mar’18.

CARB Net Profit Margin Trends

source: data explorer – net profit margin

As a result, the company’s improving margins help explain, at least partially, why ROE is also improving. Now let’s take a look at Carbonite’s efficiency performance.

Asset Turnover Trends

It appears that asset turnover of Carbonite has generally been declining over the last few years. Turnover increased from 1.06x to 1.53x in fiscal year 2016, decreased to 1.05x in 2017 and decreased again to 0.73x as of LTM Mar’18.

CARB Asset Turnover Trends

source: data explorer – asset turnover

Therefore, the company’s ROE improvement is not as a result of its asset turnover performance which has generally been decreasing.

Finally, the DuPont constituents that make up Carbonite’s ROE are shown in the table below. Note that the table also compares Carbonite to a peer group that includes Box, Inc. (NYSE: BOX), Angie’s List, Inc. (NASDAQ: ANGI), Endurance International Group Holdings, Inc.(NASDAQ: EIGI) and j2 Global, Inc. (NASDAQ: JCOM).

CARB ROE Breakdown vs Peers Table - DuPont Analysis

source:’s DuPont model

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

The DuPont approach is a helpful tool when analyzing how well management is utilizing shareholder capital. But before making an investment decision, I recommend you continue to research Carbonite to get a more comprehensive view of the company by looking at:

Valuation Metrics: what is Carbonite’s price to book ratio and how does it compare to its peers? Analyze Price / Book here.

Risk Metrics: what is Carbonite’s CapEx coverage? This is the amount a company outlays for capital assets for each dollar it generates from those investments. View the company’s CapEx coverage here.

Efficiency Metrics: inventory turnover is a ratio that measures the number of times a company’s inventory is sold and replaced over the year. View Carbonite’s inventory turnover 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 His expertise is in investment decision making. Prior to, 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 Matt can be reached at or at +1 (516) 778-6257.

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