Sprint Corporation (NYSE: S) is a large, wireless service provider in the United States. The company reported return on equity (ROE) of -14% for the 12 months ending in September 2015, with a net loss of $3.2 billion on $21.5 billion of shareholder equity. Though Sprint is not the only member of its industry that is generating negative ROEs for shareholders, most of the company's peers are consistently achieving modest profitability. Sprint's negative ROE is being driven entirely by its negative net profit margin, though low asset turnover is reducing the magnitude of the negative returns while high financial leverage is raising the magnitude of negative returns.
Historical and Peer Group Comparisons
Because Sprint reported net losses for the 12 months ending in September 2015, its ROE was negative. Sprint has not reported full-year net profits since 2006. Comparable wireless companies report average ROE of 18.4%, and some diversified telecommunications companies achieve even higher figures. Verizon Communications' ROE for the 12 months ending in September 2015 was 69%. Sprint is not alone among wireless service providers in reporting net losses; Vodafone Group also failed to generate net profit over the trailing 12 months.
DuPont Analysis deconstructs ROE into three constituent elements: net profit margin, asset turnover ratio and the equity multiplier. The value of the equity multiplier is calculated by dividing total average assets by total average shareholder value. This method allows analysts to consider each fundamental financial metric individually to identify the specific drivers of ROE.
Sprint's net profit margin for the 12 months ending in September 2015 was -9.65%, a figure that has not varied substantially since 2007. Over the past decade, Sprint's revenue has largely stagnated, while its gross profit margin declined and its operating expenses rose, leading to losses and negative returns. Analysts do not forecast profits in the coming years for Sprint. The average net profit margin for large-cap wireless companies is approximately 8%, and large diversified telecommunications firms have a similar margin profile. TELUS Corporation has the widest net margin of the peer group at 11.6%, so Sprint would not need to achieve an exceptionally high profit margin in the future to compare favorably to peers. Currently, net losses are the lone driver of Sprint's negative ROE.
Sprint's asset turnover ratio was 0.4 for the 12 months ending in September 2015. This falls near the low end of its historical distribution, though asset turnover was only 0.25 in 2013. Sprint achieved asset turnover of 0.7 in 2011 and 2012, well above the current level. The value of goodwill and intangible assets on the balance sheet have risen substantially in recent years, while revenue growth has been largely flat, leading to lower asset turnover. Wireless carrier peers report average asset turnover of 0.47 and fall between 0.34 and 0.56 over the trailing 12 months, so Sprint falls within this relatively narrow range. Because Sprint's ROE is negative due to net losses, the company's low asset turnover actually makes ROE high by reducing the absolute value of a negative number.
Sprint's equity multiplier was 3.82 for the 12 months ending in September 2015, which is relatively higher than most recent figures reported by the company. The equity multiplier was only 3 in 2008 and 2009, though the financial leverage ratio rose as high as 7.28 in 2012. A high equity multiplier indicates that a company is using more debt to finance its assets, reducing the amount of shareholder equity relative to assets on the balance sheet. Sprint's equity multiplier is slightly higher than the average wireless carrier peer, which reports an average value of 3.5. Large diversified telecom companies have even higher financial leverage ratios, similar on average to Sprint's. Sprint's high equity multiplier raises the magnitude of its negative ROE.