” We’ll use ROE to examine Burberry Group plc , by way of a worked example.” data-reactid=”18″>While some investors are already well versed in financial metrics , this article is for those who would like to learn about Return On Equity and why it is important. We’ll use ROE to examine Burberry Group plc , by way of a worked example. Return on Equity measures a company’s profitability against the profit it has kept for the business . So, as a general rule, a high ROE is a good thing .
That means it can be interesting to compare the ROE of different companies. By comparing a company’s ROE with its industry average, we can get a quick measure of how good it is. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. As is clear from the image below, Burberry Group has a better ROE than the average in the Luxury industry.
One data point to check is if insiders have bought shares recently . The Importance Of Debt To Return On Equity Most companies need money — from somewhere — to grow their profits. That cash can come from retained earnings, issuing new shares , or debt. 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 required for growth will boost returns, but will not impact the shareholders’ equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same. When I see a high ROE, fuelled by only modest debt, I suspect the business is high quality. Judicious use of debt to improve returns can certainly be a good thing, although it does elevate risk slightly and reduce future optionality.
In Summary Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. All else being equal, a higher ROE is better. So I think it may be worth checking this free report on analyst forecasts for the company . 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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