Analyzing Boeing’s Return on Equity (ROE) (BA)

The Boeing Company (NYSE: BA) achieved 52.9% return on equity (ROE) over the 12 months that ended in September 2015, with $5.6 billion in total revenue and $10.6 billion in average net shareholder equity. Boeing's recent ROE falls comfortably within its historical range and compares favorably to its peers. Net profit margin and financial leverage are the largest factors driving volatility in ROE, while high asset turnover and a high equity multiplier have pushed Boeing's ROE above those of its peers despite the company's narrow net profit margin.

Historical and Peer Comparisons

Boeing's ROE of 52.9% is the highest value since full year 2012, when its ROE was 83.1%. In the preceding decade, the company's ROE ranged from 23% to 314.6%. Boeing had one of the highest ROEs in its peer group, which includes aerospace companies in defense and civilian industries. Over the 12 months ending in September 2015, only Lockheed Martin's 96.82% ROE was higher. Airbus had the next-highest ROE with 38.1%. The group median ROE was 26.13%, well below that of Boeing's most recent figure. Even Boeing's lowest ROE of the past decade is comparable to the average for large-cap aerospace and defense industry participants, illustrating the extent to which the company compares favorably to peers in this regard.

DuPont Analysis

DuPont analysis is a useful tool for isolating different factors that contribute to ROE. ROE can be calculated by multiplying net profit margin, the asset turnover ratio and the equity multiplier together, so ROE can be deconstructed into the constituent financial metrics for observation. Boeing's net profit margin was 5.79% over the 12 months ending in September 2015. Over the preceding decade, its net margin ranged from 1.92% to 6.14%, so the current value falls near the high end of this relatively narrow distribution. Boeing has one of the lowest net profit margins among its peers. The peer group median is 9.04%, with only Airbus reporting a lower figure at 4.5%.

Boeing's asset turnover ratio was 1.01 for the 12 months ending in September 2015. This is the lowest asset turnover ratio for the company over the preceding decade, when the ratio had risen as high as 1.2. This indicates that sales have not grown as quickly as the assets on the balance sheet, while inventory expansion has been the primary factor driving asset growth. Despite being low in a historical context, Boeing's September 2015 asset turnover ratio was higher than all of its peers, with the exception of Lockheed Martin's 1.2. The median asset turnover ratio for peers was 0.86. Airbus, Boeing's rival in the commercial airliner market, only managed asset turnover of 0.64 in the period. Relative to other aerospace companies, Boeing has efficiently used its asset base to generate revenue.

Boeing's equity multiplier, calculated by dividing average total assets by average equity, was 14.7 in the 12 months ending in September 2015. This is the highest the company's equity multiplier has been since 2012, and the ratio ranged from 5.4 to 29.2 during the preceding decade. Boeing's equity multiplier is much higher than the peer group average, which has a median value of 3.9. However, Airbus and Lockheed Martin, the closest comparisons to Boeing, have equity multipliers of 16.4 and 14.0, respectively. The high equity multiplier indicates that Boeing is maintaining a capital structure with high financial leverage, though its capital structure is similar to those of its closest competitors.

Conclusions

Boeing's high ROE relative to peers is being driven primarily by its high financial leverage, while high asset turnover is also a contributing factor. Historical fluctuations in ROE can be attributed to all three elements of the DuPont analysis, though the equity multiplier has been the most volatile. The relatively high financial leverage in Boeing's capital structure means that the company is being financed largely by debt; small changes in operating fundamentals can drive relatively large swings in ROE.