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ArcelorMittal (AMS:MT) Delivered A Better ROE Than The Industry, Here’s Why

ArcelorMittal (ENXTAM:MT) outperformed the Steel industry on the basis of its ROE – producing a higher 11.23% relative to the peer average of 11.22% over the past 12 months. On the surface, this looks fantastic since we know that MT has made large profits from little equity capital; however, ROE doesn’t tell us if management have borrowed heavily to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable MT’s ROE is. Check out our latest analysis for ArcelorMittal

Breaking down ROE — the mother of all ratios

Return on Equity (ROE) weighs ArcelorMittal’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. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.

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 ArcelorMittal, which is 13.50%. Since ArcelorMittal’s return does not cover its cost, with a difference of -2.27%, this means its current use of equity is not efficient and not sustainable. Very simply, ArcelorMittal pays more 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

ENXTAM:MT Last Perf May 17th 18
ENXTAM:MT Last Perf May 17th 18

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 ArcelorMittal can make from its 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 financial leverage can artificially inflate ROE, we need to look at how much debt ArcelorMittal currently has. Currently the debt-to-equity ratio stands at a low 31.37%, which means its above-average ROE is driven by its ability to grow its profit without a significant debt burden.

ENXTAM:MT Historical Debt May 17th 18
ENXTAM:MT Historical Debt May 17th 18

Next Steps:

ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. ArcelorMittal’s ROE is impressive relative to the industry average, though its returns were not strong enough to cover its own 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 ArcelorMittal, I’ve compiled three key 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 ArcelorMittal 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 ArcelorMittal is currently mispriced by the market.

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

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