Is Expeditors International of Washington Inc’s (NASDAQ:EXPD) ROE Of 26.89% Sustainable?
Expeditors International of Washington Inc (NASDAQ:EXPD) outperformed the Air Freight and Logistics industry on the basis of its ROE – producing a higher 26.89% relative to the peer average of 11.92% over the past 12 months. Superficially, this looks great since we know that EXPD has generated big profits with little equity capital; however, ROE doesn’t tell us how much EXPD has borrowed in debt. We’ll take a closer look today at factors like financial leverage to determine whether EXPD’s ROE is actually sustainable. Check out our latest analysis for Expeditors International of Washington
Breaking down Return on Equity
Return on Equity (ROE) weighs Expeditors International of Washington’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. 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 Expeditors International of Washington’s equity capital deployed. Its cost of equity is 9.13%. Since Expeditors International of Washington’s return covers its cost in excess of 17.76%, its use of equity capital is efficient and likely to be sustainable. Simply put, Expeditors International of Washington pays less for its capital than what it generates in return. 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 Expeditors International of Washington 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 financial leverage can artificially inflate ROE, we need to look at how much debt Expeditors International of Washington currently has. Currently, Expeditors International of Washington has no debt which means its returns are driven purely by equity capital. Therefore, the level of financial leverage has no impact on ROE, and the ratio is a representative measure of the efficiency of all its capital employed firm-wide.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Expeditors International of Washington exhibits a strong ROE against its peers, as well as sufficient returns to cover its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Expeditors International of Washington, I’ve compiled three essential factors you should further research:
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.
Valuation: What is Expeditors International of Washington 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 Expeditors International of Washington is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Expeditors International of Washington? 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.
