Did BlackBerry Limited (NYSE:BB) Create Value For Shareholders?

With an ROE of 21.22%, BlackBerry Limited (NYSE:BB) outpaced its own industry which delivered a less exciting 9.11% over the past year. However, whether this above-industry ROE is actually impressive depends on if it can be maintained. A measure of sustainable returns is BB’s financial leverage. If BB borrows debt to invest in its business, its profits will be higher. But ROE does not capture any debt, so we only see high profits and low equity, which is great on the surface. But today let’s take a deeper dive below this surface. See our latest analysis for BlackBerry

Peeling the layers of ROE – trisecting a company’s profitability

Return on Equity (ROE) weighs BlackBerry’s profit against the level of its shareholders’ equity. An ROE of 21.22% implies CA$0.21 returned on every CA$1 invested, so the higher the return, the better. Investors seeking to maximise their return in the Technology Hardware, Storage and Peripherals 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 BlackBerry 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 BlackBerry’s equity capital deployed. Its cost of equity is 10.52%. Given a positive discrepancy of 10.70% between return and cost, this indicates that BlackBerry pays less for its capital than what it generates in return, which is a sign of capital efficiency. 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. Asset turnover reveals how much revenue can be generated from BlackBerry’s asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. We can determine if BlackBerry’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 BlackBerry’s debt-to-equity ratio. The most recent ratio is 26.78%, which is sensible and indicates BlackBerry has not taken on too much leverage. Thus, we can conclude its above-average ROE is generated from its capacity to increase profit without a large debt burden.

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. BlackBerry’s above-industry ROE is encouraging, and is also in excess of its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. Although ROE can be a useful metric, it is only a small part of diligent research.

For BlackBerry, I've compiled three fundamental aspects you should look at:

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 BlackBerry 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 BlackBerry is currently mispriced by the market.

3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of BlackBerry? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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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.