What You Must Know About AT & S Austria Technologie & Systemtechnik Aktiengesellschaft's (VIE:ATS) Return on Equity

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today's market.

AT & S Austria Technologie & Systemtechnik Aktiengesellschaft (VIE:ATS) performed in line with its electronic components industry on the basis of its ROE – producing a return of 10.9% relative to the peer average of 11.0% over the past 12 months. But what is more interesting is whether ATS can sustain or improve on this level of return. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of ATS's returns.

View our latest analysis for AT & S Austria Technologie & Systemtechnik

Breaking down ROE — the mother of all ratios

Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. For example, if the company invests €1 in the form of equity, it will generate €0.11 in earnings from this. Investors that are diversifying their portfolio based on industry may want to maximise their return in the Electronic Components sector by choosing the highest returning stock. However, this can be misleading as each firm has different costs of equity and debt levels i.e. the more debt AT & S Austria Technologie & Systemtechnik has, the higher ROE is pumped up in the short term, at the expense of long term interest payment burden.

ROE is measured against cost of equity in order to determine the efficiency of AT & S Austria Technologie & Systemtechnik’s equity capital deployed. Its cost of equity is 12.1%. Since AT & S Austria Technologie & Systemtechnik’s return does not cover its cost, with a difference of -1.1%, this means its current use of equity is not efficient and not sustainable. Very simply, AT & S Austria Technologie & Systemtechnik pays more 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:

Essentially, profit margin shows how much money the company makes after paying for all its expenses. The other component, asset turnover, illustrates how much revenue AT & S Austria Technologie & Systemtechnik 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. We can determine if AT & S Austria Technologie & Systemtechnik’s ROE is inflated by borrowing high levels of debt. Generally, a balanced capital structure means its returns will be sustainable over the long run. We can examine this by looking at AT & S Austria Technologie & Systemtechnik’s debt-to-equity ratio. The ratio currently stands at a sensible 72.9%, meaning AT & S Austria Technologie & Systemtechnik has not taken on excessive debt to drive its returns. The company is able to produce profit growth without a huge debt burden.

Next Steps:

ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. AT & S Austria Technologie & Systemtechnik’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. Although, its appropriate level of leverage means investors can be more confident in the sustainability of AT & S Austria Technologie & Systemtechnik’s return with a possible increase should the company decide to increase its debt levels. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.

For AT & S Austria Technologie & Systemtechnik, I've compiled three pertinent factors you should further research:

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 AT & S Austria Technologie & Systemtechnik 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 AT & S Austria Technologie & Systemtechnik is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of AT & S Austria Technologie & Systemtechnik? 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.