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SHAREHOLDER RETURNS - page 3

Using the DuPont approach to reveal what's really driving the company's ROE.

Is SLM Corporation (NASDAQ: SLM) Management Utilizing Shareholder’s Equity Efficiently?

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SLM Corporation’s (NASDAQ: SLM) most recent return on equity was an above average 15.0% in comparison to the Financials sector which returned 8.4%. Though SLM Corp’s performance over the past twelve months is impressive, it’s useful to understand how the company achieved its healthy ROE. Was it a result of profit margins, operating efficiency or maybe even leverage? Knowing these components may change your views on SLM Corp and its future prospects.


ROE Trends Of SLM Corp

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 SLM Corp is shown below.

SLM Corp's ROE Trends Chart

source: finbox.io data explorer – ROE

It appears that the return on equity of SLM Corp has generally been increasing over the last few years. ROE decreased from 18.5% to 13.9% in fiscal year 2016, increased to 14.2% in 2017 and increased again to 15.0% as of LTM Mar’18. So what’s causing the general improvement?


SLM Corp’s Improving 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 SLM Corp’s returns.

Net Profit Margin

The net profit margin of SLM Corp has generally been declining over the last few years. Margins decreased from 25.5% to 20.0% in fiscal year 2016, decreased to 19.1% in 2017 and increased to 19.8% as of LTM Mar’18.

SLM Net Profit Margin Trends

source: data explorer – net profit margin

Therefore, the company’s ROE improvement is not as a result of its net profit margin performance which has generally been decreasing. Then could the increasing ROE be a result of improving efficiency?

Asset Turnover

It appears that asset turnover of SLM Corp has generally been increasing over the last few years. Turnover decreased from 0.07x to 0.07x in fiscal year 2016, increased to 0.07x in 2017 and increased again to 0.07x as of LTM Mar’18.

SLM Asset Turnover Trends

source: data explorer – asset turnover

Therefore, the company’s increasing asset turnover ratio helps explain, at least in part, why ROE is also increasing.

Finally, the DuPont constituents that make up SLM Corp’s ROE are shown in the table below. Note that the table also compares SLM Corp to a peer group that includes Nelnet, Inc. (NYSE: NNI), Ally Financial Inc. (NYSE: ALLY), Santander Consumer USA Holdings Inc. (NYSE: SC) and OneMain Holdings, Inc. (NYSE: OMF).

SLM ROE Breakdown vs Peers Table - DuPont Analysis

source: finbox.io’s DuPont model

In conclusion, the DuPont analysis has helped us better understand that SLM Corp’s general improvement in return on equity is the result of a worsening net profit margin, an improving asset turnover ratio and increasing leverage. Therefore when looking at the core operations of the business, SLM Corp shareholders may need to start worrying due to the company’s general decline in 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. If you have not done so already, I highly recommend that you complete your research on SLM Corp by taking a look at the following:

Valuation Metrics: how much upside do shares of SLM Corp have based on the Ben Graham Formula? Take a look at our Ben Graham Formula data explorer which also compares the company’s upside to its peers.

Risk Metrics: what is SLM Corp’s Altman Z score? It’s a famous formula used to predict the probability that a firm will go into bankruptcy within two years. View the company’s Altman Z score here.

Efficiency Metrics: how much free cash flow does SLM Corp generate as a percentage of total sales? Has it been increasing or decreasing over time? Review the firm’s free cash flow margin 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.

Why Urban Outfitters, Inc. (NASDAQ: URBN) ROE of 8% Doesn’t Tell The Whole Story

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Urban Outfitters, Inc. (NASDAQ: URBN) generated a below average return on equity of 8.3% over the past twelve months, while the Consumer Discretionary sector returned 9.4%. Even though URBN’s performance is subpar relative to its peers, it’s useful to understand what’s really driving the company’s low ROE and how it’s trending. Understanding these components may change your views on URBN and its future prospects.


URBN’s Return On Equity

Return on equity represents the percentage return a company generates on the money shareholders have invested. Return on equity or ROE is defined as follows:

ROE = Net Income To Common / Average Total Common Equity

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 “manufactured” by management with the use of leverage or debt.

URBN’s historical ROE trends are highlighted in the chart below.

URBN's ROE Trends Chart

source: finbox.io data explorer – ROE

Unfortunately for shareholders, URBN’s return on equity has decreased each year since 2016. ROE decreased from 18.2% to 17.8% in fiscal year 2017, decreased to 8.3% in 2018 and the LTM period is also its latest fiscal year. So what’s causing the steady decline?


What’s Driving URBN’s Declining Return On Equity

The DuPont analysis is simply a separate way to calculate a company’s ROE:

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 driving URBN’s returns.

URBN’s Net Profit Margin

Unfortunately for shareholders, URBN’s net profit margin has decreased each year since 2016. Margins decreased from 6.5% to 6.2% in fiscal year 2017, decreased to 3.0% in 2018 and the LTM period is also its latest fiscal year.

URBN Net Profit Margin Trends

source: data explorer – net profit margin

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 URBN’s efficiency.

URBN’s Asset Turnover

It appears that asset turnover of URBN has generally been declining over the last few years. Turnover increased from 1.85x to 1.90x in fiscal year 2017, decreased to 1.88x in 2018 and the LTM period is also its latest fiscal year.

URBN Asset Turnover Trends

source: data explorer – asset turnover

Therefore, the company’s decreasing asset turnover ratio helps explain, at least partially, why ROE is also decreasing.

Finally, the DuPont constituents that make up URBN’s ROE are shown in the table below. Note that the table also compares URBN to a peer group that includes American Eagle Outfitters, Inc. (NYSE: AEO), Abercrombie & Fitch Company (NYSE: ANF), Coach, Inc. (NYSE: TPR) and Michael Kors Holdings Limited (NYSE: KORS).

URBN ROE Breakdown vs Peers Table - DuPont Analysis

source: finbox.io’s DuPont model

In conclusion, the DuPont analysis has helped us better understand that URBN’s continuous fall in return on equity is the result of a steadily deteriorating net profit margin, a declining asset turnover ratio and declining leverage. Therefore when looking at the core operations of the business, URBN shareholders have reason to be concerned due to the company’s deteriorating 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. 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 URBN 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.

Is Goldman Sachs Group Inc (NYSE: GS) Management Manufacturing ROE?

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Goldman Sachs Group Inc (NYSE: GS) delivered a below average 5.8% ROE over the past year, compared to the 8.4% return generated by the Financials sector. Goldman’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 Goldman’s performance and future prospects. I show you exactly what I mean in my DuPont analysis below.


How To Calculate Goldman’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 Goldman over the last few years is shown below.

Goldman's ROE Trends Chart

source: finbox.io data explorer – ROE

It appears that the return on equity of Goldman has generally been increasing over the last few years. ROE increased from 7.5% to 9.4% in fiscal year 2016, decreased to 5.0% in 2017 and increased to 5.8% as of LTM Mar’18. So what’s causing the general improvement?


Understanding Goldman’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 Goldman’s improving returns?

Net Profit Margin Trends

It appears that the net profit margin of Goldman has generally been increasing over the last few years. Margins increased from 16.5% to 23.2% in fiscal year 2016, decreased to 11.5% in 2017 and increased to 12.5% as of LTM Mar’18.

GS Net Profit Margin Trends

source: data explorer – net profit margin

Therefore, the company’s increasing margins help explain, at least partially, why ROE is also increasing. Now let’s take a look at Goldman’s efficiency performance to see if that is also boosting ROE.

Asset Turnover Trends

It appears that asset turnover of Goldman has generally been increasing over the last few years. Turnover decreased from 0.04x to 0.04x in fiscal year 2016, increased to 0.04x in 2017 and increased again to 0.04x as of LTM Mar’18.

GS Asset Turnover Trends

source: data explorer – asset turnover

Therefore, the company’s increasing asset turnover ratio helps explain, at least in part, why ROE is also increasing.

Finally, the DuPont constituents that make up Goldman’s ROE are shown in the table below. Note that the table also compares Goldman to a peer group that includes Morgan Stanley(NYSE: MS), Citigroup Inc. (NYSE: C), The Charles Schwab Corporation (NYSE: SCHW) and Bank of America Corporation (NYSE: BAC).

GS ROE Breakdown vs Peers Table - DuPont Analysis

source: finbox.io’s DuPont model

In conclusion, the DuPont analysis has helped us better understand that Goldman’s general improvement in return on equity is the result of an improving net profit margin, an improving asset turnover ratio and increasing leverage. Therefore when looking at the core operations of the business, Goldman shareholders have reason to be excited due to the company’s general improvement in 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. But before making an investment decision, I recommend you continue to research Goldman to get a more comprehensive view of the company by looking at:

Valuation Metrics: what is Goldman’s free cash flow yield and how does it compare to its publicly traded peers? This metric measures the amount of free cash flow for each dollar of equity (market capitalization). Analyze the free cash flow yield here.

Risk Metrics: what is Goldman’s cash ratio which is used to assess a company’s short-term liquidity. View the company’s cash ratio here.

Efficiency Metrics: return on equity is used to measure the return that a firm generates on the book value of common equity. View Goldman’s return on equity 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.

Why Morgan Stanley (NYSE: MS) 9% ROE Should Have Investors Excited

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Morgan Stanley (NYSE: MS) beat the Financials sector by 0.5% as it relates to ROE, producing a fairly healthy 8.9% compared to the sector’s 8.4%. But what is more interesting is whether Morgan Stanley will continue to achieve above average 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 healthy ROE.


Morgan Stanley’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.

Morgan Stanley’s recent ROE trends are illustrated in the chart below.

Morgan Stanley's ROE Trends Chart

source: finbox.io data explorer – ROE

It appears that the return on equity of Morgan Stanley has generally been increasing over the last few years. ROE decreased from 8.4% to 8.0% in fiscal year 2016, increased to 8.0% in 2017 and increased again to 8.9% as of LTM Mar’18. So what’s causing the general improvement?


What’s Causing Morgan Stanley’s Improving 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 Morgan Stanley’s improving returns.

Morgan Stanley’s Net Profit Margin Trends

The net profit margin of Morgan Stanley has generally been declining over the last few years. Margins decreased from 16.1% to 15.9% in fiscal year 2016, decreased to 14.7% in 2017 and increased to 16.1% as of LTM Mar’18.

MS Net Profit Margin Trends

source: data explorer – net profit margin

Therefore, the company’s ROE improvement is not as a result of its net profit margin performance which has generally been decreasing. Then could the increasing ROE be a result of improving efficiency?

Morgan Stanley’s Asset Turnover Trends

It appears that asset turnover of Morgan Stanley has generally been increasing over the last few years. Turnover decreased from 0.04x to 0.04x in fiscal year 2016, increased to 0.05x in 2017 and increased again to 0.05x as of LTM Mar’18.

MS Asset Turnover Trends

source: data explorer – asset turnover

Therefore, the company’s increasing asset turnover ratio helps explain, at least in part, why ROE is also increasing.

Finally, the DuPont constituents that make up Morgan Stanley’s ROE are shown in the table below. Note that the table also compares Morgan Stanley to a peer group that includes Goldman Sachs Group, Inc. (The) (NYSE: GS), Citigroup Inc. (NYSE: C), The Charles Schwab Corporation (NYSE: SCHW) and Bank of America Corporation (NYSE: BAC).

MS ROE Breakdown vs Peers Table - DuPont Analysis

source: finbox.io’s DuPont model

In conclusion, the DuPont analysis has helped us better understand that Morgan Stanley’s general improvement in return on equity is the result of a worsening net profit margin, an improving asset turnover ratio and increasing leverage. Therefore when looking at the core operations of the business, Morgan Stanley shareholders may need to start worrying due to the company’s general decline in 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 Morgan Stanley 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.

What’s Really Driving Adobe Systems Incorporated (NASDAQ: ADBE) Improving ROE?

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Adobe Systems Incorporated’s (NASDAQ: ADBE) most recent return on equity was an outstanding 23.2% in comparison to the Information Technology sector which returned 2.9%. Though Adobe’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 Adobe and its future prospects.


ROE Trends Of Adobe

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 Adobe is shown below.

Adobe's ROE Trends Chart

source: finbox.io data explorer – ROE

A promising sign for shareholders, Adobe’s return on equity has increased each year since 2015. ROE increased from 9.1% to 16.2% in fiscal year 2016, increased to 21.3% in 2017 and increased again to 23.2% as of LTM Feb’18. So what’s causing the steady improvement?


Adobe’s Improving 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 Adobe’s returns.

Net Profit Margin

A promising sign for shareholders, Adobe’s net profit margin has increased each year since 2015. Margins increased from 13.1% to 20.0% in fiscal year 2016, increased to 23.2% in 2017 and increased again to 24.4% as of LTM Feb’18.

ADBE 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 Adobe’s efficiency performance.

Asset Turnover

A promising sign for shareholders, Adobe’s asset turnover has increased each year since 2015. Turnover increased from 0.43x to 0.48x in fiscal year 2016, increased to 0.54x in 2017 and increased again to 0.55x as of LTM Feb’18.

ADBE Asset Turnover Trends

source: data explorer – asset turnover

As a result, the company’s improving asset turnover ratio helps explain, at least in part, why ROE is also improving.

Finally, the DuPont constituents that make up Adobe’s ROE are shown in the table below. Note that the table also compares Adobe to a peer group that includes Salesforce.com Inc (NYSE: CRM), Oracle Corporation (NYSE: ORCL), Activision Blizzard, Inc (NASDAQ: ATVI) and Fair Isaac Corporation (NYSE: FICO).

ADBE ROE Breakdown vs Peers Table - DuPont Analysis

source: finbox.io’s DuPont model

In conclusion, the DuPont analysis has helped us better understand that Adobe’s upswing in return on equity is the result of steadily improving net profit margin, an improving asset turnover ratio and increasing leverage. Therefore when looking at the core operations of the business, Adobe shareholders have reason to be excited due to the company’s steady improvement profitability along with a steady 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. If you have not done so already, I highly recommend that you complete your research on Adobe by taking a look at the following:

Valuation Metrics: what is Adobe’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 Adobe’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.

What’s Really Driving Caterpillar Inc’s (NYSE: CAT) ROE Of 15%?

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Caterpillar Inc (NYSE: CAT) generated an above average return on equity of 15.4% over the past twelve months, while the Industrials sector returned 10.6%. Even though Caterpillar’s performance is impressive relative to its peers, it’s useful to understand what’s really driving the company’s healthy ROE and how it’s trending. Understanding these components may change your views on Caterpillar and its future prospects.


Caterpillar’s Return On Equity

Return on equity represents the percentage return a company generates on the money shareholders have invested. Return on equity or ROE is defined as follows:

ROE = Net Income To Common / Average Total Common Equity

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 “manufactured” by management with the use of leverage or debt.

Caterpillar’s historical ROE trends are highlighted in the chart below.

Caterpillar's ROE Trends Chart

source: finbox.io data explorer – ROE

It appears that the return on equity of Caterpillar has generally been increasing over the last few years. ROE decreased from 15.8% to -0.5% in fiscal year 2016, increased to 5.6% in 2017 and increased again to 15.4% as of LTM Mar’18. So what’s causing the general improvement?


What’s Driving Caterpillar’s Improving Return On Equity

The DuPont analysis is simply a separate way to calculate a company’s ROE:

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 driving Caterpillar’s returns.

Caterpillar’s Net Profit Margin

It appears that the net profit margin of Caterpillar has generally been increasing over the last few years. Margins decreased from 5.3% to -0.2% in fiscal year 2016, increased to 1.7% in 2017 and increased again to 4.6% as of LTM Mar’18.

CAT Net Profit Margin Trends

source: data explorer – net profit margin

Therefore, the company’s increasing margins help explain, at least partially, why ROE is also increasing. Now let’s take a look at Caterpillar’s efficiency performance to see if that is also boosting ROE.

Caterpillar’s Asset Turnover

It appears that asset turnover of Caterpillar has generally been increasing over the last few years. Turnover decreased from 0.58x to 0.50x in fiscal year 2016, increased to 0.60x in 2017 and increased again to 0.62x as of LTM Mar’18.

CAT Asset Turnover Trends

source: data explorer – asset turnover

Therefore, the company’s increasing asset turnover ratio helps explain, at least in part, why ROE is also increasing.

Finally, the DuPont constituents that make up Caterpillar’s ROE are shown in the table below. Note that the table also compares Caterpillar to a peer group that includes Deere & Company(NYSE: DE), Cummins Inc. (NYSE: CMI), Terex Corporation (NYSE: TEX) and CNH Industrial N.V. (NYSE: CNHI).

CAT ROE Breakdown vs Peers Table - DuPont Analysis

source: finbox.io’s DuPont model

In conclusion, the DuPont analysis has helped us better understand that Caterpillar’s general improvement in return on equity is the result of an improving net profit margin, an improving asset turnover ratio and increasing leverage. Therefore when looking at the core operations of the business, Caterpillar shareholders have reason to be excited due to the company’s general improvement in 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 Caterpillar 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.

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