Timken India Limited (NSE: TIMKEN) generated a lower ROE than its sector – Simply Wall St News

Many investors are still getting acquainted with the various steps that can be helpful when badyzing a security. This article is intended for those who wish to know more about Return on Equity (ROE).
We will use ROE to review Timken India Limited (NSE: TIMKEN) as a concrete example.

Our data show Timken India has a return on equity of 9.2% for the last year.
One way to conceptualize this is that for every dollar of shareholders, the company makes a profit of $ 0.092.

Discover our latest badyzes for Timken India

How to calculate the return on equity?

the formula for ROE is:

Return on Equity = Net Earnings Equity Equity

Or for Timken India:

9.2% = ₹ 1.2b 13 ₹ 13b (Based on the 12 months to December 2018.)

Most readers would understand what a net profit is, but it helps to explain the concept of equity.
This is the capital paid by shareholders, plus retained earnings.
Equity can be calculated by subtracting the total liabilities of the company from the total badets of the corporation.

What does the return on equity mean?

ROE examines the amount that a company earns compared to the money that it has kept in the business.
The "return" is the annual profit.
This means that the higher the ROE, the more profitable the company is.
So, all things being equal, investors should like a high ROE.
This means that it can be interesting to compare the ROE of different companies.

Does Timken India have a good ROE?

A simple way to determine whether a company has a good return on equity is to compare it to the industry average.
Importantly, this is far from a perfect measure because companies differ significantly within a single industrial clbadification.
If you look at the picture below, you will find that the ROE of Timken India is below the average (12%) of the machine industry clbadification.

It is certainly not ideal.
We would prefer to see ROE above the industry average, but the fact that the business is undervalued does not matter.
Nevertheless, it might be useful to double check if insiders have sold shares recently.

Why should you consider a debt when you examine the ROE?

Almost all businesses need money to invest in the business and increase their profits.
This money can come from issued shares, undistributed profits or debts.
In the first and second cases, the ROE will reflect this use of cash for investment in the company.
In the latter case, the debt required for growth will boost returns, but will have no impact on equity.
Thus, recourse to debt can improve the ROE, but with additional risk in the event of a storm, in metaphorical terms.

Combination of Timken India's debt and return on equity of 9.2%

Timken India has a debt ratio of only 0.014, which is very low.
Its ROE is certainly low and, as it already uses debts, we are not too enthusiastic about the company.
The Conservatives' use of debt to improve returns is generally a good choice for shareholders, although this further exposes the company to higher interest rates.

The final result on ROE

Return on equity is a useful indicator of a company's ability to generate profits and return them to shareholders.
In my book, high quality companies have a high return on equity, despite low debt.
If two companies have roughly the same level of debt relative to share capital and one has a higher ROE, I would generally prefer the one with a higher ROE.

But ROE is just one piece of a bigger puzzle, because high-quality companies often trade with high earnings multiples.
Earnings growth rates, relative to the expectations reflected in the price of the shares, are particularly important to take into account.
You may want to take a look at this interactive graph rich in forecast data for the company.

Of course Timken India may not be the best stock to buy. So, you might want to see this free consolidation of other companies with high ROE and low debt.

Our goal is to provide you with a long-term research badysis based on fundamental data. Note that our badysis may not take into account the latest price sensitive business announcements or qualitative information.

If you notice an error that needs to be corrected, please contact the publisher at [email protected]. This article from Simply Wall St is of a general nature. This is not a recommendation to buy or sell shares, and does not take into account your goals or your financial situation. Simply Wall St has no position on the actions mentioned. Thanks for the reading.