Many investors are still educating themselves about the various metrics that can be useful when analyzing a stock. This article is for those who want to learn more about return on equity (ROE). We will use the ROE to examine Manaksia Coated Metals & Industries Limited (NSE: MANAKCOAT), using a real-world example.
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how effectively their capital is being reinvested. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest review for Manaksia Coated Metals & Industries
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of Manaksia Coated Metals & Industries is:
7.9% = â¹ 82m Ã· â¹ 1.0b (Based on the last twelve months up to September 2021).
“Return” refers to a company’s profits over the past year. This means that for every having shareholders, the company generated 0.08 profit.
Does Manaksia Coated Metals & Industries have a good ROE?
Perhaps the easiest way to assess a company’s ROE is to compare it to the industry average. It is important to note that this measure is far from perfect, as companies differ considerably within a single industry classification. If you look at the image below, you can see that Manaksia Coated Metals & Industries has a lower than average ROE (15%) in the classification of the metals and mining industry.
This is not what we like to see. That being said, a low ROE isn’t always a bad thing, especially if the business has low leverage as it still leaves room for improvement if the business were to take on more debt. A highly leveraged business with a low ROE is a whole different story and a risky investment on our books. Our risk dashboard should contain the 3 risks we have identified for Manaksia Coated Metals & Industries.
What is the impact of debt on ROE?
Most businesses need money – from somewhere – to increase their profits. The money for the investment can come from the profits of the previous year (retained earnings), from the issuance of new shares or from loans. In the first and second cases, the ROE will reflect this use of cash for investing in the business. 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.
Manaksia Coated Metals & Industries debt and its ROE of 7.9%
Manaksia Coated Metals & Industries uses a high amount of debt to increase returns. Its debt to equity ratio is 1.51. Its ROE is quite low, even with significant recourse to debt; this is not a good result, in our opinion. Investors should think carefully about how a business will perform if it weren’t able to borrow so easily, as credit markets change over time.
Return on equity is useful for comparing the quality of different companies. A business that can earn a high return on equity without going into debt can be considered a high quality business. All other things being equal, a higher ROE is preferable.
But when a company is of high quality, the market often offers it up to a price that reflects that. The rate at which earnings are likely to grow, relative to earnings growth expectations reflected in the current price, should also be considered. Check out the past earnings growth of Manaksia Coated Metals & Industries by looking at this visualization of past earnings, revenue and cash flow.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.