Yahoo Finance Is Banco Bilbao Vizcaya Argentaria SA’s (BME:BBVA) ROE Of 9.8% Sustainable?
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Banco Bilbao Vizcaya Argentaria SA (BME:BBVA) delivered an ROE of 9.8% over the past 12 months, which is an impressive feat relative to its industry average of 8.0% during the same period. While the impressive ratio tells us that BBVA has made significant profits from little equity capital, ROE doesn’t tell us if BBVA has borrowed debt to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether BBVA’s ROE is actually sustainable.
View our latest analysis for Banco Bilbao Vizcaya Argentaria
Peeling the layers of ROE – trisecting a company’s profitability
Return on Equity (ROE) is a measure of Banco Bilbao Vizcaya Argentaria’s profit relative to its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for Banco Bilbao Vizcaya Argentaria, which is 12.8%. Given a discrepancy of -3.0% between return and cost, this indicated that Banco Bilbao Vizcaya Argentaria 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 Banco Bilbao Vizcaya Argentaria can make from its asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be inflated by excessive debt, we need to examine Banco Bilbao Vizcaya Argentaria’s debt-to-equity level. The debt-to-equity ratio currently stands at a high 216%, meaning the above-average ratio is a result of a large amount of debt.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Banco Bilbao Vizcaya Argentaria exhibits a strong ROE against its peers, however it was not high enough to cover its own cost of equity this year. Its debt level is above equity which means its above-industry ROE may be driven by debt funding which raises concerns over the sustainability of Banco Bilbao Vizcaya Argentaria’s returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Banco Bilbao Vizcaya Argentaria, I’ve put together three pertinent factors you should further research:
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 Banco Bilbao Vizcaya Argentaria 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 Banco Bilbao Vizcaya Argentaria is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Banco Bilbao Vizcaya Argentaria? 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.
