[ad_1]
Do you want to participate in a short research study? Help us shape the future of investment tools and get a chance to win a $ 250 gift card!
One of the best investments we can make is in our own knowledge and skills. With this in mind, this article explains how we can use Return on Equity (ROE) to better understand a business.
As a hands-on learning, we will review the ER to better understand SAP SE (FRA: SAP).
Our data show SAP has a return on equity of 11% for the last year.
One way to conceptualize this is that for every euro of equity it has, the company makes a profit of 0.11 euro.
Discover our latest badyzes for SAP
How do you calculate ROE?
the formula for ROE is:
Return on Equity = Net Earnings Equity Equity
Or for SAP:
11% = 3.3 billion euros 29 29 billion euros (based on the twelve months preceding March 2019).
It is easy to understand the "net profit" part of this equation, but "equity" requires additional explanation.
These are all the profits retained by the company, plus any capital paid by the shareholders.
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 profit of the last twelve months.
The higher the ROE, the more profits the company makes.
So, as a rule, a high ROE is a good thing.
This means that ROE can be used to compare two companies.
Does SAP have a good ROE?
The simplest way to evaluate the ROE of the company is probably to compare it to the average of its sector.
Importantly, this is far from a perfect measure because companies differ significantly within a single industrial clbadification.
The picture below shows that SAP's ROE is roughly the average of the software industry (9.9%).
It's not surprising, but it's respectable.
ROE does not tell us if the price of the stock is low, but it can inform us of the nature of the business. For those looking for a good deal, other factors may be more important.
If you are like me, then you do not want to miss free list of growing companies that insiders buy.
What is the impact of debt on return on equity?
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 use of debt will improve returns, but will not change equity.
In this way, the use of debt will increase the ROE, even if the basic economy of the company remains the same.
Combination of SAP debt and its return on equity of 11%
Although SAP uses debt, its debt-to-equity ratio of 0.50 remains low.
His very respectable ROE, combined with a modest debt, suggests that the company is doing well.
The judicious use of debt to improve returns can certainly be a good thing, even if it slightly increases risk and reduces future opportunities.
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.
A company that can achieve a high return on debt-free equity could be considered a high quality company.
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.
It is important to consider other factors, such as future earnings growth – and the amount of investment required.
You may want to take a look at this interactive graph rich in forecast data for the company.
Of course, you could find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies.
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.
Calculation of discounted cash flow for each stock
Simply Wall St performs a detailed calculation of discounted cash flows every 6 hours for each market share. If you want to find the intrinsic value of any business, just search here. It's free.
Source link
