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What is Behind The Toronto-Dominion Bank’s (NYSE:TD) Superior ROE?

The Toronto-Dominion Bank (NYSE:TD) delivered an ROE of 14.13% over the past 12 months, which is an impressive feat relative to its industry average of 8.48% during the same period. Superficially, this looks great since we know that TD has generated big profits with little equity capital; however, ROE doesn’t tell us how much TD has borrowed in debt. We’ll take a closer look today at factors like financial leverage to determine whether TD’s ROE is actually sustainable. Check out our latest analysis for Toronto-Dominion Bank

Peeling the layers of ROE – trisecting a company’s profitability

Return on Equity (ROE) is a measure of Toronto-Dominion Bank’s profit relative to its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.14 in earnings from this. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.

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Return on Equity = Net Profit ÷ Shareholders Equity

ROE is measured against cost of equity in order to determine the efficiency of Toronto-Dominion Bank’s equity capital deployed. Its cost of equity is 9.90%. Since Toronto-Dominion Bank’s return covers its cost in excess of 4.23%, its use of equity capital is efficient and likely to be sustainable. Simply put, Toronto-Dominion Bank pays less for its capital than what it generates in return. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

NYSE:TD Last Perf May 25th 18
NYSE:TD Last Perf May 25th 18

Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover shows how much revenue Toronto-Dominion Bank can generate with its current asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine Toronto-Dominion Bank’s debt-to-equity level. At over 2.5 times, Toronto-Dominion Bank’s debt-to-equity ratio is very high and indicates the above-average ROE is generated by significant leverage levels.

NYSE:TD Historical Debt May 25th 18
NYSE:TD Historical Debt May 25th 18

Next Steps:

While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. Toronto-Dominion Bank’s above-industry ROE is encouraging, and is also in excess of its cost of equity. With debt capital in excess of equity, ROE may be inflated by the use of debt funding, raising questions over the sustainability of the company’s returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.

For Toronto-Dominion Bank, I’ve put together three important factors you should further research:

  1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Valuation: What is Toronto-Dominion Bank worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Toronto-Dominion Bank is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Toronto-Dominion Bank? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.