ArcelorMittal SA (ADR)’s (NYSE: MT) most recent return on equity was an above average 12.5% in comparison to the Materials sector which returned 6.1%. Though ArcelorMittal’s performance over the past twelve months is impressive, it’s useful to understand how the company achieved its healthy ROE. Was it a result of profit margins, operating efficiency or maybe even leverage? Knowing these components may change your views on ArcelorMittal and its future prospects.

ROE Trends Of ArcelorMittal

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. It is calculated as follows:

ROE = Net Income To Common / Average Total Common Equity

ROE is a helpful metric that illustrates how effective the company is at turning the cash put into the business into gains or returns for investors. But it is important to note that ROE can be impacted by management’s financing decisions such as the deployment of leverage.

The return on equity of ArcelorMittal is shown below.

source: data explorer – ROE

It appears that the data explorer – ROE of ArcelorMittal has generally been increasing over the last few years. ROE increased from -21.9% to 5.9% in fiscal year 2016 and increased to 12.5% in 2017. So what’s causing the general improvement?

ArcelorMittal’s Improving ROE Trends

In addition to the formula previously discussed, there’s actually another way to calculate ROE. It’s often called the DuPont formula and is as follows:

Return on Equity = Net Profit Margin * Asset Turnover * Equity Multiplier

Analyzing changes in these three items over time allows investors to figure out if operating efficiency, asset use efficiency or the use of leverage is what’s causing changes in ROE. Strong companies should have ROE that is increasing because its net profit margin and/or asset turnover is increasing. On the other hand, a company may not be as strong as investors would otherwise think if ROE is increasing from the use of leverage or debt.

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