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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 examine Asian Granito India Limited (NSE: ASIANTILES) as a concrete example.
Asian Granito India has a ROE of 7.3%, based on the last twelve months.
This means that for every dollar of equity this generates a profit of £ 0.073.
See our latest badysis for Asian Granito India
How do you calculate ROE?
the return on equity formula is:
Return on Equity = Net Earnings Equity Equity
Or for Asian Asia Granito:
7.3% = £ 319 M 4.8 4.8 4.8 ₹ (based on the twelve months preceding December 2018)
It is easy to understand the "net profit" part of this equation, but "equity" requires additional explanation.
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 Asian Granito India 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.
However, this method is only useful as a rough check, as companies differ somewhat in the same industrial clbadification.
As shown in the graph below, Asian Granito India has a below average ROE (10%) of the building sector clbadification.
Unfortunately, this is not optimal.
We prefer it when the ROE of a company is above the industry average, but it is not the panacea if it is lower.
Again, shareholders might want to check if insiders have sold.
Why should you consider a debt when you examine the ROE?
Companies usually need to invest money to increase their profits.
This money can come from retained earnings, issuance of new shares (equity) or debt.
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 used for growth will improve returns, but will not affect total equity.
This will make the ROE better than if no debt was used.
Granito India's Asian debt and return on equity of 7.3%
The Asian Granito India has a debt ratio of 0.70, which is far from being excessive.
His ROE is rather weak and the company already has debts. Shareholders are hoping for improvement.
The judicious use of debt to improve returns can certainly be a good thing, even if it slightly increases risk and reduces future opportunities.
In summary
Return on equity is one of the ways in which we can compare the commercial quality of different companies.
Companies that can earn high returns on their own funds without much debt are generally of good quality.
All things being equal, a higher ROE is preferable.
But when a company is of high quality, the market often offers it a price that takes it into account.
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.
But note: Asian Granito India may not be the best stock 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.
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