By way of learning-by-doing, we’ll look at ROE to gain a better understanding of Tricorn Group plc . Over the last twelve months Tricorn Group has recorded a ROE of 12% . That means that for every £1 worth of shareholders’ equity, it generated £0.12 in profit. Return on Equity measures a company’s profitability against the profit it has kept for the business .
The higher the ROE, the more profit the company is making. So, all else being equal, a high ROE is better than a low one . That means it can be interesting to compare the ROE of different companies. Arguably the easiest way to assess company’s ROE is to compare it with the average in its industry.
ROE doesn’t tell us if the share price is low, but it can inform us to the nature of the business. For those looking for a bargain, other factors may be more important. I will like Tricorn Group better if I see some big insider buys. Companies usually need to invest money to grow their profits.
That cash can come from issuing shares, retained earnings, or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the use of debt will improve the returns, but will not change the equity. That will make the ROE look better than if no debt was used.
The combination of modest debt and a very respectable ROE suggests this is a business worth watching. Conservative use of debt to boost returns is usually a good move for shareholders, though it does leave the company more exposed to interest rate rises. The Bottom Line On ROE Return on equity is useful for comparing the quality of different businesses. Companies that can achieve high returns on equity without too much debt are generally of good quality.
Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So I think it may be worth checking this free report on analyst forecasts for the company . Of course Tricorn Group may not be the best stock to buy . So you may wish to see this free collection of other companies that have high ROE and low debt.
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