As of January 2015, the average return on equity, or ROE, for companies in the automotive sector was approximately 17%, which significantly outperforms the overall market average of 14.5%.
The Automotive Sector
The automotive industry is a large spectrum of companies that participate in designing, developing, manufacturing, marketing and selling motor vehicles. In terms of revenue, this sector is among the market’s most significant economic sectors, considered a benchmark for the economy as a whole.
In recent years, the automotive sector has been significantly impacted by emerging market economies. A J.D. Power study conducted in 2010 revealed emerging markets accounted for 51% of worldwide light-vehicle sales.
The largest automotive manufacturing companies, such as Ford and General Motors, are among the largest industrial firms in the world. The automotive sector’s performance substantially impacts a number of other sectors, including the energy and transportation sectors.
Return on Equity
ROE is an equity valuation tool that measures the rate of return common stock shareholders receive compared to the equity invested in the company. ROE indicates the efficiency with which a company generates profits from the per share equity invested by shareholders. Essentially, this metric reveals how successful a company is at using investments to engender earnings growth. As with the majority of financial ratios, ROE is best used when comparing companies within the same industry.
It is worth noting the ROE for the automotive sector, once adjusted for research and development, or R&D, costs, is approximately 11%. This is significant because R&D is a major expense for this sector. As of 2013, the automotive sector spent approximately 15% of sales revenues on research and development.