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Can CommScope Holding Company Inc (NASDAQ:COMM) Continue To Outperform Its Industry?

Casey Hall

CommScope Holding Company Inc (NASDAQ:COMM) delivered an ROE of 12.55% over the past 12 months, which is an impressive feat relative to its industry average of 6.35% during the same period. Superficially, this looks great since we know that COMM has generated big profits with little equity capital; however, ROE doesn’t tell us how much COMM has borrowed in debt. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable COMM’s ROE is. See our latest analysis for CommScope Holding Company

Breaking down Return on Equity

Return on Equity (ROE) weighs CommScope Holding Company’s profit against the level of its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.13 in earnings from this. 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 measured against cost of equity in order to determine the efficiency of CommScope Holding Company’s equity capital deployed. Its cost of equity is 12.53%. This means CommScope Holding Company returns enough to cover its own cost of equity, with a buffer of 0.02%. 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

NasdaqGS:COMM Last Perf Feb 15th 18

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. Asset turnover reveals how much revenue can be generated from CommScope Holding Company’s asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be artificially increased through excessive borrowing, we should check CommScope Holding Company’s historic debt-to-equity ratio. Currently the debt-to-equity ratio stands at more than 2.5 times, which means its above-average ROE is driven by significant debt levels.

NasdaqGS:COMM Historical Debt Feb 15th 18

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. CommScope Holding Company’s ROE is impressive relative to the industry average and also covers its cost of equity. Its high debt level means its strong ROE may be driven by debt funding which raises concerns over the sustainability of CommScope Holding Company’s returns. Although ROE can be a useful metric, it is only a small part of diligent research.

For CommScope Holding Company, I’ve compiled three pertinent aspects you should further examine:

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.