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SHAREHOLDER RETURNS - page 9

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

Why Walt Disney Co’s (NYSE: DIS) 23% ROE Should Have Investors Excited

in SHAREHOLDER RETURNS by

Walt Disney Co’s (NYSE: DIS) most recent return on equity was an outstanding 23.2% in comparison to the Consumer Discretionary sector which returned 8.8%. Though Walt Disney’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 Walt Disney and its future prospects.


ROE Trends Of Walt Disney

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 Walt Disney is shown below.

Walt Disney's ROE Trends Chart

source: finbox.io data explorer – ROE

It appears that the return on equity of Walt Disney has generally been increasing over the last few years. ROE increased from 17.3% to 19.6% in fiscal year 2016, decreased to 19.5% in 2017 and increased to 23.2% as of LTM Dec’17. So what’s causing the general improvement?


Walt Disney’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 Walt Disney’s returns.

Net Profit Margin

It appears that the net profit margin of Walt Disney has generally been increasing over the last few years. Margins increased from 16.0% to 16.9% in fiscal year 2016, decreased to 16.3% in 2017 and increased to 19.6% as of LTM Dec’17.

DIS 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 Walt Disney’s efficiency performance to see if that is also boosting ROE.

Asset Turnover

It appears that asset turnover of Walt Disney has generally been increasing over the last few years. Turnover increased from 0.61x to 0.62x in fiscal year 2016, decreased to 0.59x in 2017 and stayed there as of LTM Dec’17.

DIS 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 Walt Disney’s ROE are shown in the table below. Note that the table also compares Walt Disney to a peer group that includes Time Warner Inc.(NYSE: TWX), CBS Corporation (NYSE: CBS.A), Live Nation Entertainment, Inc. (NYSE: LYV) and World Wrestling Entertainment, Inc. (NYSE: WWE).

DIS ROE Breakdown vs Peers Table - DuPont Analysis

source: finbox.io’s DuPont model

In conclusion, the DuPont analysis has helped us better understand that Walt Disney’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, Walt Disney shareholders have reason to be excited due to the company’s general improvement in profitability along with a general improvement in operational efficiency.

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 Walt Disney by taking a look at the following:

Valuation Metrics: how much upside do shares of Walt Disney have based on Wall Street’s consensus price target? Take a look at our analyst upside data explorer that compares the company’s upside relative to its peers.

Risk Metrics: what is Walt Disney’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: how much free cash flow does Walt Disney generate as a percentage of total sales? Has it been increasing or decreasing over time? Review the firm’s free cash flow margin here.


Author: Andy Pai

Expertise: financial modeling, mergers & acquisitions

Andy is also a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to do investment research. Andy’s background is in investment banking where he led the analysis on over 50 board advisory engagements involving mergers and acquisitions, fairness opinions and solvency opinions. Some of his board advisory highlights:

  • Sears Holdings Corp.’s $620 mm spin-off via rights offering of Sears Outlet, Hometown Stores and Sears Hardware Stores.
  • Cerberus Capital Management’s $3.3 bn acquisition of SUPERVALU Inc.’s New Albertsons, Inc. assets.

Andy can be reached at andy@finbox.io.

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 Nucor Corporation’s (NYSE: NUE) Management Manufacturing ROE?

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Nucor Corporation (NYSE: NUE) beat the Materials sector by 9.0% as it relates to ROE, producing a healthy 15.2% compared to the sector’s 6.1%. But what is more interesting is whether Nucor 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.


Nucor’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.

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

Nucor's ROE Trends Chart

source: finbox.io data explorer – ROE

It appears that the return on equity of Nucor has generally been increasing over the last few years. ROE increased from 1.0% to 9.9% in fiscal year 2016, increased to 15.2% in 2017 and the LTM period is also its latest fiscal year. So what’s causing the general improvement?


What’s Causing Nucor’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 Nucor’s improving returns.

Nucor’s Net Profit Margin Trends

It appears that the net profit margin of Nucor has generally been increasing over the last few years. Margins increased from 0.5% to 4.9% in fiscal year 2016, increased to 6.5% in 2017 and the LTM period is also its latest fiscal year.

NUE 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 Nucor’s efficiency performance to see if that is also boosting ROE.

Nucor’s Asset Turnover Trends

It appears that asset turnover of Nucor has generally been increasing over the last few years. Turnover stayed at 1.10x in fiscal year 2016, increased to 1.30x in 2017 and the LTM period is also its latest fiscal year.

NUE 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 Nucor’s ROE are shown in the table below. Note that the table also compares Nucor to a peer group that includes United States Steel Corporation (NYSE: X), Commercial Metals Company (NYSE: CMC), AK Steel Holding Corporation (NYSE: AKS) and Worthington Industries, Inc. (NYSE: WOR).

NUE ROE Breakdown vs Peers Table - DuPont Analysis

source: finbox.io’s DuPont model

In conclusion, the DuPont analysis has helped us better understand that Nucor’s general improvement in return on equity is the result of an improving net profit margin, an improving asset turnover ratio and declining leverage. Therefore when looking at the core operations of the business, Nucor shareholders have reason to be excited due to the company’s general improvement in profitability along with a general improvement 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 Nucor to gain a better understanding of its fundamentals before making an investment decision.


Author: Brian Dentino

Expertise: financial technology, analyzing market trends

Brian is a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to research stock fundamentals. Brian’s background is in physics & computer science and previously worked as a software engineer at GE Healthcare. He enjoys applying his expertise in technology to help find market trends that impact investors.

Brian can be reached at brian@finbox.io.

As of this writing, Brian 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 Procter & Gamble Co’s (NYSE: PG) ROE Of 18%?

in SHAREHOLDER RETURNS by

Procter & Gamble Co (NYSE: PG) beat the Consumer Staples sector by 7.1% as it relates to ROE, producing a healthy 18.5% compared to the sector’s 11.3%. But what is more interesting is whether Procter & Gamble 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.


Procter & Gamble’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.

Procter & Gamble’s recent ROE trends are illustrated in the chart below.

Procter & Gamble's ROE Trends Chart

source: finbox.io data explorer – ROE

It appears that the return on equity of Procter & Gamble has generally been increasing over the last few years. ROE increased from 10.4% to 17.8% in fiscal year 2016, increased to 29.1% in 2017 and decreased to 18.5% as of LTM Dec’17. So what’s causing the general improvement?


What’s Causing Procter & Gamble’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 Procter & Gamble’s improving returns.

Procter & Gamble’s Net Profit Margin Trends

It appears that the net profit margin of Procter & Gamble has generally been increasing over the last few years. Margins increased from 9.6% to 15.7% in fiscal year 2016, increased to 23.2% in 2017 and decreased to 15.0% as of LTM Dec’17.

PG 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 Procter & Gamble’s efficiency performance to see if that is also boosting ROE.

Procter & Gamble’s Asset Turnover Trends

It looks like asset turnover of Procter & Gamble has also generally been increasing over the last few years. Turnover decreased from 0.52x to 0.51x in fiscal year 2016, increased to 0.53x in 2017 and increased again to 0.54x as of LTM Dec’17.

PG 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 Procter & Gamble’s ROE are shown in the table below. Note that the table also compares Procter & Gamble to a peer group that includes Colgate-Palmolive Company (NYSE: CL), Kimberly-Clark Corporation (NYSE: KMB), Church & Dwight Company, Inc. (NYSE: CHD) and Clorox Company (The) (NYSE: CLX).

PG ROE Breakdown vs Peers Table - DuPont Analysis

source: finbox.io’s DuPont model

In conclusion, the DuPont analysis has helped us better understand that Procter & Gamble’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, Procter & Gamble shareholders have reason to be excited due to the company’s general improvement in profitability along with a general improvement in operational efficiency.

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 Procter & Gamble to gain a better understanding of its fundamentals before making an investment decision.


Author: Brian Dentino

Expertise: financial technology, analyzing market trends

Brian is a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to research stock fundamentals. Brian’s background is in physics & computer science and previously worked as a software engineer at GE Healthcare. He enjoys applying his expertise in technology to help find market trends that impact investors.

Brian can be reached at brian@finbox.io.

As of this writing, Brian 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 Edison International’s (NYSE: EIX) Declining ROE?

in SHAREHOLDER RETURNS by

Edison International (NYSE: EIX) generated a below average return on equity of 4.0% over the past twelve months, while the Utilities sector returned 8.4%. Even though Edison’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 Edison and its future prospects.


Edison’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.

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

Edison's ROE Trends Chart

source: finbox.io data explorer – ROE

The return on equity of Edison has generally been declining over the last few years. ROE decreased from 14.1% to 7.7% in fiscal year 2015, increased to 9.5% in 2016 and decreased to 4.0% in 2017. So what’s causing the general decline?


What’s Driving Edison’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 Edison’s returns.

Edison’s Net Profit Margin

The net profit margin of Edison has generally been declining over the last few years. Margins had reached 12% in fiscal year 2014 but have since dropped to 4.6%.

EIX 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 Edison’s efficiency performance.

Edison’s Asset Turnover

It appears that asset turnover of Edison has generally been increasing over the last few years. Turnover increased slightly to 0.23x in fiscal year 2016 and increased again to 0.24x in 2017.

EIX Asset Turnover Trends

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 Edison’s ROE are shown in the table below. Note that the table also compares Edison to a peer group that includes FirstEnergy Corporation(NYSE: FE), Entergy Corporation (NYSE: ETR), American Electric Power Company, Inc. (NYSE: AEP) and PG&E Corporation (NYSE: PCG).

EIX ROE Breakdown vs Peers Table - DuPont Analysis

source: finbox.io’s DuPont model

In conclusion, the DuPont analysis has helped us better understand that Edison’s general decline in return on equity is the result of a worsening net profit margin, an improving asset turnover ratio and declining leverage. Therefore when looking at the core operations of the business, Edison shareholders do not need to be too concerned due to the company’s general improvement 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 Edison to gain a better understanding of its fundamentals before making an investment decision.


Author: Matt Hogan

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 InvestorPlaceBenzingaValueWalkAAIIBarron’sSeeking Alpha and investing.com.

Matt can be reached at matt@finbox.io.

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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