Yahoo Finance What You Must Know About Activision Blizzard Inc’s (NASDAQ:ATVI) Return on Equity
Activision Blizzard Inc’s (NASDAQ:ATVI) most recent return on equity was a substandard 3.53% relative to its industry performance of 13.38% over the past year. Though ATVI’s recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on ATVI’s below-average returns. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of ATVI’s returns. View our latest analysis for Activision Blizzard
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) weighs Activision Blizzard’s profit against the level of its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.04 in earnings from this. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
Returns are usually compared to costs to measure the efficiency of capital. Activision Blizzard’s cost of equity is 9.90%. Given a discrepancy of -6.37% between return and cost, this indicated that Activision Blizzard may be paying more for its capital than what it’s generating 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:
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
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 Activision Blizzard 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 financial leverage can artificially inflate ROE, we need to look at how much debt Activision Blizzard currently has. Currently the debt-to-equity ratio stands at a low 44.73%, which means Activision Blizzard still has headroom to take on more leverage in order to increase profits.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Activision Blizzard’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 Activision Blizzard’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 Activision Blizzard, I’ve put together three important aspects you should look at:
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.
Valuation: What is Activision Blizzard 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 Activision Blizzard is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Activision Blizzard? 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.
