Can Bristol-Myers Squibb Company’s (NYSE:BMY) ROE Continue To Surpass The Industry Average?
Bristol-Myers Squibb Company (NYSE:BMY) delivered an ROE of 27.38% over the past 12 months, which is an impressive feat relative to its industry average of 11.69% during the same period. On the surface, this looks fantastic since we know that BMY 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 BMY’s ROE is. View our latest analysis for Bristol-Myers Squibb
Breaking down Return on Equity
Return on Equity (ROE) weighs Bristol-Myers Squibb’s profit against the level of its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.27 in earnings from this. 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
Returns are usually compared to costs to measure the efficiency of capital. Bristol-Myers Squibb’s cost of equity is 8.49%. Given a positive discrepancy of 18.88% between return and cost, this indicates that Bristol-Myers Squibb pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be dissected into three distinct 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
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. The other component, asset turnover, illustrates how much revenue Bristol-Myers Squibb 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 ROE can be artificially increased through excessive borrowing, we should check Bristol-Myers Squibb’s historic debt-to-equity ratio. At 56.61%, Bristol-Myers Squibb’s debt-to-equity ratio appears sensible and indicates the above-average ROE is generated from its capacity to increase profit without a large debt burden.
What this means for you:
Are you a shareholder? BMY’s ROE is impressive relative to the industry average and also covers its cost of equity. Since ROE is not inflated by excessive debt, it might be a good time to add more of BMY to your portfolio if your personal research is confirming what the ROE is telling you. If you’re looking for new ideas for high-returning stocks, you should take a look at our free platform to see the list of stocks with Return on Equity over 20%.
Are you a potential investor? If you are considering investing in BMY, looking at ROE on its own is not enough to make a well-informed decision. I recommend you do additional fundamental analysis by looking through our most recent infographic report on Bristol-Myers Squibb to help you make a more informed investment decision.
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.
