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Did Heartland Financial USA Inc (NASDAQ:HTLF) Create Value For Shareholders?

Heartland Financial USA Inc (NASDAQ:HTLF) delivered an ROE of 9.58% over the past 12 months, which is an impressive feat relative to its industry average of 8.93% during the same period. Superficially, this looks great since we know that HTLF has generated big profits with little equity capital; however, ROE doesn’t tell us how much HTLF has borrowed in debt. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable HTLF’s ROE is. Check out our latest analysis for Heartland Financial USA

Breaking down ROE — the mother of all ratios

Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.1 in earnings from this. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.

Return on Equity = Net Profit ÷ Shareholders Equity

ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for Heartland Financial USA, which is 9.86%. Since Heartland Financial USA’s return does not cover its cost, with a difference of -0.28%, this means its current use of equity is not efficient and not sustainable. Very simply, Heartland Financial USA pays more for its capital than what it generates in return. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

NasdaqGS:HTLF Last Perf Dec 17th 17
NasdaqGS:HTLF Last Perf Dec 17th 17

Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover reveals how much revenue can be generated from Heartland Financial USA’s asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. Since financial leverage can artificially inflate ROE, we need to look at how much debt Heartland Financial USA currently has. The debt-to-equity ratio currently stands at a low 48.89%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.

NasdaqGS:HTLF Historical Debt Dec 17th 17
NasdaqGS:HTLF Historical Debt Dec 17th 17

What this means for you:

Are you a shareholder? HTLF’s above-industry ROE is noteworthy, but it was not high enough to cover its own cost of equity. However, investors shouldn’t despair since ROE is not inflated by excessive debt, which means HTLF still has room to improve shareholder returns by raising debt to fund new investments. If you’re looking for new ideas for high-returning stocks, you should take a look at our free platform to see the list of stocks with Return on Equity over 20%.

Are you a potential investor? If you are considering investing in HTLF, looking at ROE on its own is not enough to make a well-informed decision. I recommend you do additional fundamental analysis by looking through our most recent infographic report on Heartland Financial USA to help you make a more informed investment decision.


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.

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