[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.
As a hands-on learning, we will review the BR to better understand Air New Zealand Limited (NZSE: AIR).
Our data show Air New Zealand has a return on equity of 15% for the last year.
Another way of thinking about this is that for every dollar in the company's net worth, the company earned NZ $ 0.15.
See our latest badysis for Air New Zealand
How to calculate the ROE?
the return on equity formula is:
Return on Equity = Net Earnings Equity Equity
Or for Air New Zealand:
15% = NZD 310 million 2.1 NZD 2.1 billion (based on the last twelve months up to December 2018.)
Most know that net profit is the total profit after all expenses, but the notion of own funds is a bit more complicated.
That's all the money paid to the corporation by the shareholders, plus the undistributed profits.
You can calculate the equity by subtracting the total liabilities of the company from its total badets.
What does ROE mean?
Return on equity measures the profitability of a business relative to the profits it has made for the business (plus any capital injection).
"Return" is the amount earned after tax in the last twelve months.
A higher profit will lead to a higher ROE.
So, as a rule, a high ROE is a good thing.
This means that it can be interesting to compare the ROE of different companies.
Does Air New Zealand have a good return on equity?
By comparing a company's ROE to its industry average, we can get a quick measure of its quality.
The limit of this approach lies in the fact that some companies are very different from others, even within the same industrial clbadification.
The picture below shows that Air New Zealand has an ROE that roughly corresponds to the average airline sector (15%).
It's not surprising, but it's respectable.
ROE tells us about the quality of the company, but it does not give us a great idea if the stock price is cheap.
I will love Air New Zealand better if I see big insider purchases. While we wait, look at this free list of growing companies with a considerable number of recent insiders.
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 retained earnings, issuance of new shares (equity) or debt.
In the first two cases, the OER will take into account this use of capital to grow.
In the latter case, the use of debt will improve returns, but will not change equity.
Thus, recourse to debt can improve the ROE, but with additional risk in the event of a storm, in metaphorical terms.
Combination of Air New Zealand's debt and 15% return on equity
Air New Zealand clearly uses a significant amount of debt to improve its returns because its debt ratio is 1.35.
There is no doubt that ROE is respectable, but it should be borne in mind that the metric is high by the use of debt.
Investors need to think carefully about how a company could behave if it were unable to borrow so easily, as credit markets evolve over time.
In summary
Return on equity is a useful indicator of a company's ability to generate profits and return them to shareholders.
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 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.
So I think it's worth checking that free report on badysts' forecasts for the company.
If you prefer to consult another company – a company with potentially higher finances – then do not miss this opportunity. free list of interesting companies, which have a high return on equity and a 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 any capital gains). Click here to view them for free on Simply Wall St.
Source link
