DTLK’s Return on Equity is on a positive trend since 2009. Still it is below industry average. Note that Datalink is exposed to more than one business. Going a little bit further we can see DTLK actually has a better than average ROE facing pure Storage players.
ROA presents the same trend as ROE and once again DTLK’s is lower than Industry average. Although this time ROA is actually lower than average Storage players’. Despite Datalink’s inexistent debt, liabilities account for about 70% of total assets. Of this, almost 90% is due to referred revenue from customer support contracts (>55%) and accounts payable (>30%).
This means that ROE is mostly driven by this financial leverage rather than from ROA.
So, Net margin seems to be the driver of the trend behind ROA’s and consequently ROE’s evolution. As we saw before (see Industry Analysis), DTLK has the lowest profitability of the industry as its reseller business accounts for the majority of its sales.
Asset turnover is being very inconsistent, as acquisitions change the relationship between assets and sales. The decrease in Asset turnover was compensated by the increase in profitability.
Datalink presents no debt and tax rate has been consistent around 40% so I find no need to detail Dupont analysis any further.
To conclude, financial leverage is the major driver of ROE, then Asset turnover and only after these comes profit margin. Nevertheless profit margin seems to be of extremely importance because it is very close to the “water line” and it can easily turn ROE negative.