[ad_1]
Although some investors are already familiar with financial indicators (cap), this article is for people who want to know more about ROE and its importance.
We will use ROE to review The Indian Hotels Company Limited (NSE: INDHOTEL) as a concrete example.
Our data show Indian Hotels has a return on equity of 5.1% for the last year.
One way to conceptualize this is that for every dollar of equity, the company made a profit of $ 0.051.
See our latest badysis for Indian hotels
How to calculate the return on equity?
the return on equity formula is:
Return on Equity = Net Earnings Equity Equity
Or for Indian hotels:
5.1% = ₹ 2.5b ₹ 50b (Based on the last twelve months up to December 2018.)
Most readers would understand what a net profit is, but it helps to explain the concept of equity.
That's all the money paid to the corporation by the shareholders, plus the undistributed profits.
The simplest way to calculate equity is to subtract the total liabilities of the company from the total badets.
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.
The higher the ROE, the more profits the company makes.
So, all things being equal, investors should like a high ROE.
Clearly, we can use ROE to compare different companies.
Do Indian hotels have a good return on investment?
The simplest way to evaluate the ROE of the company is probably to compare it to the average of its sector.
The limit of this approach lies in the fact that some companies are very different from others, even within the same industrial clbadification.
As the picture below clearly shows, Indian Hotels has an ROE below the average (6.5%) of the hospitality sector.
Unfortunately, this is not optimal.
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 wise to check if insiders have sold.
The importance of debt to return on equity
Most businesses need money – from somewhere – to increase their profits.
The money for investment can come from the profits of the previous fiscal year (retained earnings), the issuance of new shares or the loan.
In the first and second cases, the ROE will reflect this use of cash for investment in the company.
In the latter case, the use of debt will improve returns, but will not change equity.
This will make the ROE better than if no debt was used.
The combination of Indian hotel debt and its return on equity of 5.1%
Indian Hotels has a debt ratio of 0.48, which is far from excessive.
Its ROE is certainly low and, as it already uses debts, we are not too enthusiastic about the company.
Prudent use of debt to improve returns is often very beneficial to shareholders. However, this could reduce the company's ability to take advantage of future opportunities.
But this is only a metric
Return on equity is useful for comparing the quality of different companies.
Companies that can earn high returns on their own funds without much debt are generally of good quality.
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 when a company is of high quality, the market often offers it a price that takes it into account.
The probable rate of profit growth relative to the earnings growth forecast reflected in the current price must also be taken into account.
You may want to take a look at this interactive graph rich in forecast data for the company.
But note: Indian hotels may not be the best reserve to buy. So take a look at this free list of interesting 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.
These excellent dividend stocks beat your savings account
Not only have these stocks been reliable dividend payers for 10 years, but, with a return of more than 3%, they also easily beat your savings account (not to mention the potential gains). Click here to view them for free on Simply Wall St.
Source link
