With that in mind, this article will work through how we can use Return On Equity to better understand a business. ” We’ll use ROE to examine Ideagen plc , by way of a worked example.” data-reactid=”19″>One of the best investments we can make is in our own knowledge and skill set. We’ll use ROE to examine Ideagen plc , by way of a worked example.
Ideagen has a ROE of 0.2% , based on the last twelve months. Another way to think of that is that for every £1 worth of equity in the company, it was able to earn £0.0018. Shareholders’ equity can be calculated by subtracting the total liabilities of the company from the total assets of the company. ROE looks at the amount a company earns relative to the money it has kept within the business.
So, as a general rule, a high ROE is a good thing . Clearly, then, one can use ROE to compare different companies. Arguably the easiest way to assess company’s ROE is to compare it with the average in its industry. As is clear from the image below, Ideagen has a lower ROE than the average in the Software industry.
We’d prefer see an ROE above the industry average, but it might not matter if the company is undervalued. Nonetheless, it could be useful to double-check if insiders have sold shares recently . Why You Should Consider Debt When Looking At ROE Companies usually need to invest money to grow their profits. The cash for investment can come from prior year profits , issuing new shares, or borrowing.
In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the debt used for growth will improve returns, but won’t affect the total equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking. Ideagen’s Debt And Its 0.2% ROE While Ideagen does have some debt, with debt to equity of just 0.10, we wouldn’t say debt is excessive.
Its ROE is quite low, and the company already has some debt, so surely shareholders are hoping for an improvement. 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 one way we can compare the business quality of different companies. A company that can achieve a high return on equity without debt could be considered a high quality business.
The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. So you might want to take a peek at this data-rich interactive graph of forecasts for the company . Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. If you spot an error that warrants correction, please contact the editor at . It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation.
Simply Wall St has no position in the stocks mentioned. Thank you for reading.
Click here to read the full article