Investors often use return on equity as a quick way to judge the overall quality of a company. After all, the more profit a company churns out on a given amount of equity, the more of the green stuff it can pile up for its investors.
Since an ugly 2006, Skyworks Solutions (Nasdaq: SWKS) has seen its ROE steadily climb from -12.1% to a positive 12.5%. If you back out restructuring charges from Skyworks' 2006 results, its ROE wasn't quite so grisly, but the gains have been solid nonetheless. But before you get too excited, it's important to remember that not all ROE gains are made equal, so it pays to figure out exactly where those gains are coming from.
A DuPont analysis breaks down ROE into three parts: profit margin, asset turnover, and leverage. This allows investors to pinpoint exactly how a given company is generating its returns.
Let's take a look at how Skyworks has been drumming up its extra returns.
|
2007 |
2008 |
2009 |
Past 12 Months | |
|---|---|---|---|---|
|
Net Income Margin |
7.8% |
12.9% |
11.6% |
14.9% |
|
Asset Turnover |
0.7 times |
0.7 times |
0.6 times |
0.7 times |
|
Leverage |
1.5 times |
1.3 times |
1.2 times |
1.2 times |
Source: Capital IQ, a division of Standard & Poor's, and author's calculations.
This is a good showing for Skyworks. The company has managed to steadily increase its profit margin and has mostly kept asset utilization at a stable level.
At the same time, Skyworks has reduced its balance-sheet leverage. Though reduced leverage does lower ROE, it generally puts a company in a safer financial position. And this certainly looks to be the case in Skyworks' case -- the company had roughly $250 million in cash against $300 million in debt in 2007 and as of July it had $390 million in cash versus just $74 million in debt.
Of course, we don't want to just look at Skyworks in a vacuum. Here's a look at how the company stacks up against some comparable companies.
|
Company |
Net Income Margin |
Asset Turnover |
Leverage |
ROE |
|---|---|---|---|---|
|
Skyworks |
14.9% |
0.7 times |
1.2 times |
12.5% |
|
RF Micro Devices (Nasdaq: RFMD) |
9.1% |
1 time |
1.9 times |
17.3% |
|
TriQuint Semiconductor (Nasdaq: TQNT) |
8.5% |
1.1 times |
1.2 times |
11.2% |
|
Atheros Communications (Nasdaq: ATHR) |
13% |
1 time |
1.2 times |
15.6% |
|
Microchip Technology (Nasdaq: MCHP) |
26% |
0.4 times |
1.7 times |
17.7% |
Source: Capital IQ, a division of Standard & Poor's, and author's calculations. Data is for past 12-month period. ROE is return on ending equity.
Lining up Skyworks with the rest of this group, we can see that its profitability is near the top of the heap. Its overall return on equity, however, doesn't compare particularly well. Digging a little deeper, though, we can see that Skyworks' balance sheet has been bloated by nearly $500 million in goodwill.
Skyworks' goodwill was primarily created by the transaction that made Skyworks, well, Skyworks -- it was previously Alpha Industries. The intangible assets that the goodwill points to may help Skyworks produce the results that it does, but it also obscures the fact that the company may be more efficient and profitable than many of its peers.
The semiconductor industry that Skyworks plays in is cyclical and has no dearth of competition. In the past few years, though, it looks like Skyworks has been improving its business and rewarding shareholders in the process.
Warren Buffett doesn't like tech stocks. Or does he?
