How Airbus SE (EPA:AIR) Delivered A Better ROE Than Its Industry

With an ROE of 21.55%, Airbus SE (ENXTPA:AIR) outpaced its own industry which delivered a less exciting 14.50% over the past year. However, whether this above-industry ROE is actually impressive depends on if it can be maintained. This can be measured by looking at the company’s financial leverage. With more debt, AIR can invest even more and earn more money, thus pushing up its returns. However, ROE only measures returns against equity, not debt. This can be distorted, so let’s take a look at it further. View our latest analysis for Airbus

Breaking down Return on Equity

Return on Equity (ROE) is a measure of Airbus’s profit relative to its shareholders’ equity. An ROE of 21.55% implies €0.22 returned on every €1 invested, so the higher the return, the better. Investors seeking to maximise their return in the Aerospace and Defense industry may want to choose 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 Airbus has, the higher ROE is pumped up in the short term, at the expense of long term interest payment burden.

Returns are usually compared to costs to measure the efficiency of capital. Airbus’s cost of equity is 8.35%. This means Airbus returns enough to cover its own cost of equity, with a buffer of 13.20%. This sustainable practice implies that the company pays less for its capital than what it generates in return. ROE can be broken down into three different 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 Airbus can make from its asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. We can determine if Airbus’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 Airbus’s debt-to-equity ratio. The ratio currently stands at a sensible 83.86%, meaning Airbus 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:

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. Airbus 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. Although ROE can be a useful metric, it is only a small part of diligent research.

For Airbus, I've put together three pertinent factors you should further examine below. Just a heads up - to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.

• 1. Financial Health: Does it have a healthy balance sheet? Take a look at this free balance sheet analysis with six simple checks on key factors like leverage and risk.
• 2. Valuation: What is Airbus worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in this free research report helps visualize whether Airbus is currently mispriced by the market.
• 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Airbus? Explore this interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!