What Is Dragging Down Samsung’s ROE?

Samsung Electronics‘ (PINK:SSNLF) return on equity (ROE) stood at about 15% in 2014. This compares unfavorably to the figures for other large tech companies, including rival Apple’s (NASDAQ:AAPL) 33% figure and 20% for Intel. ROE is one indicator of shareholder returns, and a higher ROE indicates management’s efficiency in utilizing the equity base. Samsung’s relatively low ROE can be largely attributed to its compressed margins and a very high cash balance.  Historically, the company has maintained around 26% of its total assets in cash.  ^[1] At the end of December 2014, its cash balance was around $58 billion. The company generated around $35 billion in cash from operating activities in 2014, and $44 billion in 2013. While a significant portion of this cash was reinvested in the business – around $21 and $22 billion respectively in 2014 and 2013 on capital expenditure – there is a lot of cash on the balance sheet going unused, which can be a drag on a company’s ROE. In this note we take a look at Samsung’s ROE and what is weighing on it. 

See Our Complete Analysis For Samsung Here

Lower Net Margins, High Cash Lead To Low ROE 

As mentioned above, Samsung’s 2014 return on equity was around 15% (Net Income/Average Shareholder’s equity) compared to around 33% for Apple and 20% for Intel.  The high ROE of these companies can be partly attributed to their net margins. Apple and Intel’s net margins are above 20%, while Samsung’s are lower at 11%.  These low margins lead to a compressed ROE for Samsung. However, it is the massive cash balance that really keeps it low.

Meaningful Deployment Of Cash Can Improve ROE

Returning excess cash to shareholders by way of buybacks or dividends can be a way of improving a company’s ROE.  For instance, if Samsung were to do a buyback to the tune of $10 billion, based on its 2014 net income its ROE could increase to 16%.  However, if the company saw growth opportunities, reinvesting the cash into the business should generate better returns and therefore have a more positive impact on the ROE.  Samsung is struggling with its smartphone business, facing significant declines in market share. With competition intensifying in developing markets, Samsung could look at strategic acquisitions to strengthen its position as well as its ROE.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Samsung SEC filings [↩]