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Can LyondellBasell Industries NV.’s (NYSE:LYB) ROE Continue To Surpass The Industry Average?

With an ROE of 54.69%, LyondellBasell Industries NV. (NYSE:LYB) outpaced its own industry which delivered a less exciting 13.48% over the past year. On the surface, this looks fantastic since we know that LYB has made large profits from little equity capital; however, ROE doesn’t tell us if management have borrowed heavily to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether LYB’s ROE is actually sustainable. View our latest analysis for LyondellBasell Industries

Breaking down ROE — the mother of all ratios

Return on Equity (ROE) weighs LyondellBasell Industries’s profit against the level of its shareholders’ equity. An ROE of 54.69% implies $0.55 returned on every $1 invested. 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 LyondellBasell Industries’s equity capital deployed. Its cost of equity is 9.37%. Since LyondellBasell Industries’s return covers its cost in excess of 45.32%, its use of equity capital is efficient and likely to be sustainable. Simply put, LyondellBasell Industries 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

NYSE:LYB Last Perf Mar 27th 18
NYSE:LYB Last Perf Mar 27th 18

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 LyondellBasell Industries can make from its asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine LyondellBasell Industries’s debt-to-equity level. At 96.95%, LyondellBasell Industries’s debt-to-equity ratio appears balanced and indicates the above-average ROE is generated from its capacity to increase profit without a large debt burden.

NYSE:LYB Historical Debt Mar 27th 18
NYSE:LYB Historical Debt Mar 27th 18

Next Steps:

While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. LyondellBasell Industries’s ROE is impressive relative to the industry average and also covers 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. Although ROE can be a useful metric, it is only a small part of diligent research.

For LyondellBasell Industries, I’ve compiled three relevant factors you should further examine:

  1. 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.

  2. Valuation: What is LyondellBasell Industries 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 LyondellBasell Industries is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of LyondellBasell Industries? 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.

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