A Closer Look at Rushil Decor Limited’s Impressive ROE (NSE: RUSHIL)

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One of the best investments we can make is in our own knowledge and skills. With that in mind, this article will explain how we can use return on equity (ROE) to better understand a business. We will use ROE to review Rushil Decor Limited (NSE: Rushil), as a concrete example.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Our analysis indicates that RUSHIL is potentially undervalued!

How to calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Rushil Decor is:

20% = ₹576m ÷ ₹2.9b (Based on past twelve months to June 2022).

“Yield” is the income the business has earned over the past year. This means that for every ₹1 of equity, the company generated ₹0.20 of profit.

Does Rushil Decor have a good return on equity?

By comparing a company’s ROE with the average for its industry, we can get a quick measure of its quality. However, this method is only useful as a rough check, as companies differ quite a bit within the same industry classification. Fortunately, Rushil Décor has an above average ROE (15%) in the Building industry.

NSEI: RUSHIL Return on Equity November 1, 2022

It’s a good sign. However, keep in mind that a high ROE does not necessarily indicate efficient profit generation. A higher proportion of debt in a company’s capital structure can also result in a high ROE, where high debt levels could be a huge risk. You can see the 2 risks we have identified for Rushil Décor by visiting our risk dashboard free on our platform here.

What is the impact of debt on ROE?

Most businesses need money – from somewhere – to increase their profits. This money can come from issuing shares, retained earnings or debt. In the case of the first and second options, the ROE will reflect this use of cash, for growth. 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 ROE, even though the core economics of the business remains the same.

Combine Rushil Decor’s debt and its 20% return on equity

Rushil Décor is clearly using a high amount of debt to boost returns, as it has a debt-to-equity ratio of 1.47. Although its ROE is quite respectable, the amount of debt the company is currently carrying is not ideal. Investors need to think carefully about how a company would perform if it weren’t able to borrow so easily, as credit markets change over time.

Summary

Return on equity is a way to compare the business quality of different companies. In our books, the highest quality companies have a high return on equity, despite low leverage. If two companies have roughly the same level of debt and one has a higher ROE, I generally prefer the one with a higher ROE.

That said, while ROE is a useful indicator of a company’s quality, you’ll need to consider a whole host of factors to determine the right price to buy a stock. The rate at which earnings are likely to grow, relative to earnings growth expectations reflected in the current price, should also be considered. Check Rushil Decor’s past earnings growth by watching this visualization of past profits, revenue and cash flow.

But note: Rushil Decor 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.

Valuation is complex, but we help make it simple.

Find out if Rushil Decor is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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