Yahoo Finance Can Omnicom Group Inc’s (NYSE:OMC) ROE Continue To Surpass The Industry Average?
This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Omnicom Group Inc (NYSE:OMC).
Omnicom Group Inc (NYSE:OMC) outperformed the Advertising industry on the basis of its ROE – producing a higher 35.80% relative to the peer average of 14.15% over the past 12 months. Superficially, this looks great since we know that OMC has generated big profits with little equity capital; however, ROE doesn’t tell us how much OMC has borrowed in debt. We’ll take a closer look today at factors like financial leverage to determine whether OMC’s ROE is actually sustainable. See our latest analysis for Omnicom Group
What you must know about ROE
Return on Equity (ROE) is a measure of Omnicom Group’s profit relative to its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.36 in earnings from this. 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 Omnicom Group, which is 10.14%. Given a positive discrepancy of 25.67% between return and cost, this indicates that Omnicom Group 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:
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
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover shows how much revenue Omnicom Group can generate with its current asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be artificially increased through excessive borrowing, we should check Omnicom Group’s historic debt-to-equity ratio. The debt-to-equity ratio currently stands at a balanced 146.13%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Omnicom Group’s ROE is impressive relative to the industry average and also covers 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. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Omnicom Group, I’ve compiled three key aspects 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 Omnicom 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 Omnicom Group is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Omnicom 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.
