ROE Analysis of Company A & B

ROE of company B has been deteriorated from 12.8% at 2006 to pathetic 4.2% at 2013. At the same time, ROE of
Company A maintained at average 12%.
Why Company Bs ROE has been deteriorated to only 4.2% from 12.8%?
Why Company A ROE is 200% above Company?

2013 2012 2011 2010 2009 2008 2007 2006
ROE of A 13.9% 10.1% 8.6% 12.1% 11.1% 11.8% 14.4% 12.9%
ROE of B 4.2% 4.2% 5.5% 7.3% 7.8% 6.9% 9.8% 12.8%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
8-years ROE Trend of A & B


Operating Efficiency
Net income margin (NIM) of Company A (14.4%) is 1.7 times higher than Company B (5.2%). Company Bs NIM has
been deteriorated more than 50% from 12.8% at 2006 to only 5.2% at 2013.
It indicates that Company A has higher operating efficiency than B. As discussed in income statement analysis,
Company A has higher gross margin profit than B and also lower operating expense (as % of sales) than B.
From the graph above, ROE of Company B is moving in tandem with its deteriorating NIM over the years. This is why
the ROE has been deteriorated even the company is highly leveraged.
Assets Use Efficiency
Asset Turnover (AT) of Company A (0.87) is much higher than Company B (0.42). Note that the revenue grow of
Company B (15.2%) is twice of A (6.6%), but the AT of Company B did not improve despite its high revenue growth. It
shows that Company B required high CapEx to sustain its high revenue growth.
AT of Company A is good at high 0.82, it shows a better efficiency in use of its asset to generate sales than Company
B.
2013 2012 2011 2010 2009 2008 2007 2006
ROE 13.9% 10.1% 8.6% 12.1% 11.1% 11.8% 14.4% 12.9%
NIM 14.4% 10.8% 10.1% 15.5% 11.9% 11.6% 15.9% 14.6%
FL 1.11 1.12 1.12 1.12 1.11 1.13 1.13 1.12
AT 0.87 0.83 0.75 0.70 0.83 0.90 0.80 0.79
0.00
0.50
1.00
1.50
2.00
2.50
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
Company A - 3 Step DuPont Analysis
2013 2012 2011 2010 2009 2008 2007 2006
ROE 4.2% 4.2% 5.5% 7.3% 7.8% 6.9% 9.8% 12.8%
NIM 5.2% 5.4% 6.9% 8.1% 9.3% 7.6% 10.1% 13.6%
FL 1.88 1.86 2.08 2.01 2.03 2.44 2.48 2.23
AT 0.42 0.41 0.39 0.45 0.41 0.37 0.39 0.42
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Company B - 3 Step DuPont Analysis
Financial Leverage
With excellent low financial leverage (1.11), ROE of Company A is surpass B. However, the highly financial leverage
(1.88) with D/E of 0.6 Company B could only achieve pathetic ROE of 0.42. It indicates that Company B has very high
business & financial risk as compare to low leveraged, higher NIM of Company A.
Which Company is more efficient?
From DuPont Analysis, ROE of a company can be improved by increasing its net profit margin, asset turnover (by
either increase sales or use the asset efficiently) or financial leverage. Improvement of ROE due to its higher
operating (NIM) or assets use efficiency is good sign. On the other hand, improvement of ROE by increasing its
financial leverage may be a negative sign if the company is over-leveraged.
Company As ROE is slightly improved to 13.9% as it has improve its asset turnover. With 13.9% ROE which is above
cost of equity, Company A appears to be a good company for investment (after find out its value-price).
On the other hand, Company Bs ROE has been deteriorated to only 4.2% despite its high financial leverage & right
issue/private placement. Its NIM & AT are much lower than Company A, and it show that the operating & asset use
efficiency is very low. Considering the high risk taken (highly leverage), investing in a low 4.2% ROE firm is definitely a
bad investment.