【what is annealing and normalizing】Should We Be Delighted With Techedge S.p.A.’s (BIT:EDGE) ROE Of 18%?
One of the best investments we can make is what is annealing and normalizingin our own knowledge and skill set. With that in mind, this article will work through how we can use Return On Equity (ROE) to better understand a business. To keep the lesson grounded in practicality, we’ll use ROE to better understand Techedge S.p.A. (
BIT:EDGE
).
Our data shows
Techedge has a return on equity of 18%
for the last year. Another way to think of that is that for every €1 worth of equity in the company, it was able to earn €0.18.
See our latest analysis for Techedge
How Do I Calculate ROE?
The
formula for ROE
is:
Return on Equity = Net Profit ÷ Shareholders’ Equity
Or for Techedge:
18% = 11.925 ÷ €65m (Based on the trailing twelve months to June 2018.)
Most know that net profit is the total earnings after all expenses, but the concept of shareholders’ equity is a little more complicated. It is all earnings retained by the company, plus any capital paid in by shareholders. You can calculate shareholders’ equity by subtracting the company’s total liabilities from its total assets.
What Does ROE Signify?
Return on Equity measures a company’s profitability against the profit it has kept for the business (plus any capital injections). The ‘return’ is the amount earned after tax over the last twelve months. The higher the ROE, the more profit the company is making. So, as a general rule,
a high ROE is a good thing
. That means ROE can be used to compare two businesses.
Does Techedge Have A Good ROE?
Arguably the easiest way to assess company’s ROE is to compare it with the average in its industry. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. As you can see in the graphic below, Techedge has a higher ROE than the average (14%) in the IT industry.
BIT:EDGE Last Perf January 2nd 19
That’s what I like to see. In my book, a high ROE almost always warrants a closer look. One data point to check is if
insiders have bought shares recently
.
How Does Debt Impact ROE?
Companies usually need to invest money to grow their profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt used for growth will improve returns, but won’t affect the total equity. That will make the ROE look better than if no debt was used.
Techedge’s Debt And Its 18% ROE
Techedge has a debt to equity ratio of 0.50, which is far from excessive. The fact that it achieved a fairly good ROE with only modest debt suggests the business might be worth putting on your watchlist. Judicious use of debt to improve returns can certainly be a good thing, although it does elevate risk slightly and reduce future optionality.
Story continues
In Summary
Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. In my book the highest quality companies have high return on equity, despite low debt. If two companies have around the same level of debt to equity, and one has a higher ROE, I’d generally prefer the one with higher ROE.
But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. It is important to consider other factors, such as future profit growth — and how much investment is required going forward. You can see how the company has grow in the past by looking at this FREE
detailed graph
of past earnings, revenue and cash flow
.
Of course
Techedge may not be the best stock to buy
. So you may wish to see this
free
collection of other companies that have high ROE and low debt.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at
.
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