Cabot Microelectronics Corporation (NASDAQ:CCMP) Delivered A Better ROE Than The Industry, Here’s Why
Cabot Microelectronics Corporation (NASDAQ:CCMP) delivered an ROE of 15.92% over the past 12 months, which is an impressive feat relative to its industry average of 8.36% during the same period. Superficially, this looks great since we know that CCMP has generated big profits with little equity capital; however, ROE doesn’t tell us how much CCMP has borrowed in debt. We’ll take a closer look today at factors like financial leverage to determine whether CCMP’s ROE is actually sustainable. Check out our latest analysis for Cabot Microelectronics
What you must know about ROE
Return on Equity (ROE) is a measure of Cabot Microelectronics’s profit relative to its shareholders’ equity. An ROE of 15.92% implies $0.16 returned on every $1 invested. 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 measured against cost of equity in order to determine the efficiency of Cabot Microelectronics’s equity capital deployed. Its cost of equity is 9.79%. Given a positive discrepancy of 6.13% between return and cost, this indicates that Cabot Microelectronics pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be broken down into three different 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. Asset turnover shows how much revenue Cabot Microelectronics 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 Cabot Microelectronics currently has. The debt-to-equity ratio currently stands at a low 24.19%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
What this means for you:
Are you a shareholder? CCMP’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 CCMP 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 CCMP, basing your decision on ROE alone is certainly not sufficient. I recommend you do additional fundamental analysis by looking through our most recent infographic report on Cabot Microelectronics 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.
