Advertisement
U.S. markets open in 45 minutes
  • S&P Futures

    5,306.25
    -2.00 (-0.04%)
     
  • Dow Futures

    40,155.00
    +11.00 (+0.03%)
     
  • Nasdaq Futures

    18,495.00
    -8.75 (-0.05%)
     
  • Russell 2000 Futures

    2,140.30
    +1.90 (+0.09%)
     
  • Crude Oil

    82.65
    +1.30 (+1.60%)
     
  • Gold

    2,209.10
    +18.50 (+0.84%)
     
  • Silver

    24.69
    -0.06 (-0.25%)
     
  • EUR/USD

    1.0798
    -0.0032 (-0.29%)
     
  • 10-Yr Bond

    4.2320
    +0.0360 (+0.86%)
     
  • Vix

    12.96
    +0.18 (+1.40%)
     
  • GBP/USD

    1.2629
    -0.0009 (-0.07%)
     
  • USD/JPY

    151.2690
    +0.0230 (+0.02%)
     
  • Bitcoin USD

    70,517.10
    +448.78 (+0.64%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,947.99
    +16.01 (+0.20%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

Does Avantor, Inc. (NYSE:AVTR) Create Value For Shareholders?

While some investors are already well versed in financial metrics (hat tip), this article is for those who would like to learn about Return On Equity (ROE) and why it is important. To keep the lesson grounded in practicality, we'll use ROE to better understand Avantor, Inc. (NYSE:AVTR).

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Avantor

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Avantor is:

13% = US$530m ÷ US$4.1b (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.13 in profit.

Does Avantor Have A Good ROE?

By comparing a company's ROE with its industry average, we can get a quick measure of how good it is. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. If you look at the image below, you can see Avantor has a similar ROE to the average in the Life Sciences industry classification (16%).

roe
roe

That's neither particularly good, nor bad. Although the ROE is similar to the industry, we should still perform further checks to see if the company's ROE is being boosted by high debt levels. If true, then it is more an indication of risk than the potential. To know the 4 risks we have identified for Avantor visit our risks dashboard for free.

The Importance Of Debt To Return On Equity

Companies usually need to invest money to grow their profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the debt used for growth will improve returns, but won't affect the total equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.

Avantor's Debt And Its 13% ROE

It's worth noting the high use of debt by Avantor, leading to its debt to equity ratio of 1.34. While its ROE is respectable, it is worth keeping in mind that there is usually a limit as to how much debt a company can use. Investors should think carefully about how a company might perform if it was unable to borrow so easily, because credit markets do change over time.

Summary

Return on equity is useful for comparing the quality of different businesses. In our books, the highest quality companies have high return on equity, despite low debt. All else being equal, a higher ROE is better.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.

Of course Avantor may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Advertisement