We’ll use ROE to examine easyHotel plc , by way of a worked example. Another way to think of that is that for every £1 worth of equity in the company, it was able to earn £0.0039. Shareholders’ equity can be calculated by subtracting the total liabilities of the company from the total assets of the company. 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. That means ROE can be used to compare two businesses. By comparing a company’s ROE with its industry average, we can get a quick measure of how good it is. As is clear from the image below, easyHotel has a lower ROE than the average in the Hospitality industry.
We prefer it when the ROE of a company is above the industry average, but it’s not the be-all and end-all if it is lower. 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 debt used for growth will improve returns, but won’t affect the total equity.
That will make the ROE look better than if no debt was used. easyHotel’s Debt And Its 0.4% ROE Although easyHotel does use debt, its debt to equity ratio of 0.15 is still low. Careful use of debt to boost returns is often very good for shareholders. However, it could reduce the company’s ability to take advantage of future opportunities.
The Bottom Line On ROE Return on equity is useful for comparing the quality of different businesses. A company that can achieve a high return on equity without debt could be considered a high quality business. All else being equal, a higher ROE is better. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider.
So you might want to take a peek at this data-rich interactive graph of forecasts for the company . Of course easyHotel 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. 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.
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