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Can Australia and New Zealand Banking Group Limited (ASX:ANZ) Continue To Outperform Its Industry?

With an ROE of 12.45%, Australia and New Zealand Banking Group Limited (ASX:ANZ) outpaced its own industry which delivered a less exciting 11.83% over the past year. While the impressive ratio tells us that ANZ has made significant profits from little equity capital, ROE doesn’t tell us if ANZ has borrowed debt to make this happen. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of ANZ’s ROE. View our latest analysis for Australia and New Zealand Banking Group

Breaking down Return on Equity

Return on Equity (ROE) weighs Australia and New Zealand Banking Group’s profit against the level of its shareholders’ equity. An ROE of 12.45% implies A$0.12 returned on every A$1 invested. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.

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Return on Equity = Net Profit ÷ Shareholders Equity

Returns are usually compared to costs to measure the efficiency of capital. Australia and New Zealand Banking Group’s cost of equity is 8.55%. Since Australia and New Zealand Banking Group’s return covers its cost in excess of 3.90%, its use of equity capital is efficient and likely to be sustainable. Simply put, Australia and New Zealand Banking Group 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

ASX:ANZ Last Perf Jun 8th 18
ASX:ANZ Last Perf Jun 8th 18

Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover shows how much revenue Australia and New Zealand Banking Group can generate with its current 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 financial leverage can artificially inflate ROE, we need to look at how much debt Australia and New Zealand Banking Group currently has. The debt-to-equity ratio currently stands at over 2.5 times, meaning the above-average ratio is a result of a large amount of debt.

ASX:ANZ Historical Debt Jun 8th 18
ASX:ANZ Historical Debt Jun 8th 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. Australia and New Zealand Banking Group’s ROE is impressive relative to the industry average and also covers its cost of equity. Its high debt level means its strong ROE may be driven by debt funding which raises concerns over the sustainability of Australia and New Zealand Banking Group’s returns. Although ROE can be a useful metric, it is only a small part of diligent research.

For Australia and New Zealand Banking Group, I’ve compiled three pertinent aspects 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 Australia and New Zealand Banking Group 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 Australia and New Zealand Banking Group is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Australia and New Zealand Banking Group? 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.