A closer look at the impressive ROE of American Tower Corporation (NYSE:AMT)

While some investors are already familiar with financial metrics (hat trick), this article is for those who want to learn more about return on equity (ROE) and why it matters. To keep the lesson grounded in practicality, we’ll use ROE to better understand American Tower Corporation (NYSE:AMT).

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for American Tower

How do you calculate return on equity?

The return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for American Tower is:

26% = US$2.8 billion ÷ US$11 billion (based on trailing 12 months to June 2022).

The “yield” is the profit of the last twelve months. Another way to think about this is that for every dollar of equity, the company was able to make a profit of $0.26.

Does American Tower have a good ROE?

By comparing a company’s ROE with the average for its industry, we can get a quick measure of its quality. It is important to note that this measure is far from perfect, as companies differ significantly within the same industry classification. As you can see in the chart below, American Tower has an above average ROE (6.6%) for the REIT industry.

This is clearly a positive point. Keep in mind that a high ROE does not always mean superior financial performance. Besides changes in net income, a high ROE can also be the result of high debt to equity, which indicates risk. You can see the 2 risks we have identified for American Tower by visiting our risk dashboard for free on our platform here.

The Importance of Debt to Return on Equity

Companies generally need to invest money to increase their profits. The money for the investment can come from the previous year’s earnings (retained earnings), from issuing new shares or from borrowing. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, debt used for growth will enhance returns, but will not affect total equity. This will make the ROE better than if no debt was used.

American Tower’s debt and its 26% ROE

It seems that American Tower relies heavily on debt to improve its returns, as it has an alarming debt-to-equity ratio of 3.81. So, although the company has an impressive ROE, the company might not have been able to achieve this without the heavy use of debt.

Summary

Return on equity is a way to compare the business quality of different companies. In our books, the highest quality companies have a high return on equity, despite low leverage. If two companies have roughly the same level of debt and one has a higher ROE, I generally prefer the one with a higher ROE.

But ROE is only one piece of a larger puzzle, as high-quality companies often trade on high earnings multiples. It is important to consider other factors, such as future earnings growth and the amount of investment needed in the future. So I think it’s worth checking it out free analyst forecast report for the company.

Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.