Broadcom’s efficiency ratios
Broadcom (AVGO) has been acquiring underperforming semiconductor companies and turning them around through heavy cost-cutting and effective integration. CA Technologies met the parameters Broadcom CEO Hock Tan considers in an acquisition target. CA Technologies is a market leader that has high cash flow and is not at the peak of its business—its core market, mainframe software, is declining. Broadcom acquires such companies to earn decent cash flow and improve overall efficiency.
Return on investments
A company’s ROI (return on investment) measures the income it earns on investments. In November, Broadcom’s TTM (trailing-12-month) ROI rose to 30.84% from 27.5% to August as the company realized synergies from Brocade’s acquisition and benefited from higher exposure to Apple’s (AAPL) 2018 iPhone models. Broadcom’s ROI was lower than Texas Instruments’ (TXN) ROI of 31.35%, as the latter has lower debt.
On the other hand, rival Qualcomm (QCOM) had a negative ROI of -13.6% as it lost all of its Apple business amid the companies’ ongoing licensing and patent dispute. As companies’ debt-to-equity ratios can impact their ROI, shareholders should also look at their ROE (return on equity).
Return on equity
A company’s ROE shows the profit it can generate from shareholder capital. A company can improve its ROE by repurchasing shares, improving its net income, or by reducing debt.
In November, Broadcom improved its TTM ROE to 49.4% from 42.6% in August. Broadcom’s ROE is higher than TXN’s 43.2%, as the former has initiated a $12 billion stock buyback.
Broadcom’s high efficiency ratios and stable earnings make it a good long-term investment. However, it remains to be seen if the CA Technologies acquisition can improve Broadcom’s ROE.
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