Advertisement
U.S. markets open in 3 hours 11 minutes
  • S&P Futures

    5,304.50
    -3.75 (-0.07%)
     
  • Dow Futures

    40,133.00
    -11.00 (-0.03%)
     
  • Nasdaq Futures

    18,487.25
    -16.50 (-0.09%)
     
  • Russell 2000 Futures

    2,135.90
    -2.50 (-0.12%)
     
  • Crude Oil

    81.95
    +0.60 (+0.74%)
     
  • Gold

    2,218.90
    +6.20 (+0.28%)
     
  • Silver

    24.58
    -0.17 (-0.67%)
     
  • EUR/USD

    1.0786
    -0.0043 (-0.40%)
     
  • 10-Yr Bond

    4.1960
    0.0000 (0.00%)
     
  • Vix

    12.99
    +0.21 (+1.64%)
     
  • GBP/USD

    1.2610
    -0.0029 (-0.23%)
     
  • USD/JPY

    151.4130
    +0.1670 (+0.11%)
     
  • Bitcoin USD

    70,434.32
    +431.62 (+0.62%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,968.49
    +36.51 (+0.46%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

How Aptiv PLC (NYSE:APTV) Delivered A Better ROE Than Its Industry

Aptiv PLC (NYSE:APTV) delivered an ROE of 30.23% over the past 12 months, which is an impressive feat relative to its industry average of 15.03% during the same period. On the surface, this looks fantastic since we know that APTV has made large profits from little equity capital; however, ROE doesn’t tell us if management have borrowed heavily to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether APTV’s ROE is actually sustainable. See our latest analysis for Aptiv

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

Return on Equity (ROE) weighs Aptiv’s profit against the level of its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.

Return on Equity = Net Profit ÷ Shareholders Equity

ROE is measured against cost of equity in order to determine the efficiency of Aptiv’s equity capital deployed. Its cost of equity is 10.58%. This means Aptiv returns enough to cover its own cost of equity, with a buffer of 19.64%. 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

NYSE:APTV Last Perf May 2nd 18
NYSE:APTV Last Perf May 2nd 18

The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover shows how much revenue Aptiv can generate with its current 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 Aptiv currently has. Currently the debt-to-equity ratio stands at a balanced 117.97%, which means its above-average ROE is driven by its ability to grow its profit without a significant debt burden.

NYSE:APTV Historical Debt May 2nd 18
NYSE:APTV Historical Debt May 2nd 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. Aptiv’s above-industry ROE is encouraging, and is also in excess of its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.

For Aptiv, there are three essential factors you should further examine:

  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 Aptiv 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 Aptiv is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Aptiv? 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.

Advertisement