Yahoo Finance Did Advanced Energy Industries Inc (NASDAQ:AEIS) Create Value For Shareholders?
Advanced Energy Industries Inc (NASDAQ:AEIS) delivered an ROE of 25.47% over the past 12 months, which is an impressive feat relative to its industry average of 13.79% during the same period. While the impressive ratio tells us that AEIS has made significant profits from little equity capital, ROE doesn’t tell us if AEIS has borrowed debt to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable AEIS’s ROE is. Check out our latest analysis for Advanced Energy Industries
What you must know about ROE
Return on Equity (ROE) weighs Advanced Energy Industries’s profit against the level of its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.25 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.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for Advanced Energy Industries, which is 9.74%. This means Advanced Energy Industries returns enough to cover its own cost of equity, with a buffer of 15.73%. This sustainable practice implies that the company 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
Essentially, profit margin shows how much money the company makes after paying for all its expenses. The other component, asset turnover, illustrates how much revenue Advanced Energy Industries can make from its asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since financial leverage can artificially inflate ROE, we need to look at how much debt Advanced Energy Industries currently has. Currently, Advanced Energy Industries has no debt which means its returns are driven purely by equity capital. Therefore, the level of financial leverage has no impact on ROE, and the ratio is a representative measure of the efficiency of all its capital employed firm-wide.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Advanced Energy Industries’s above-industry ROE is encouraging, and is also in excess of its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Advanced Energy Industries, I’ve put together three important factors you should further examine:
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.
Valuation: What is Advanced Energy Industries 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 Advanced Energy Industries is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Advanced Energy Industries? 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.
