Many investors are still learning the different metrics that can be useful when analyzing a stock. This article is for those who want to know more about return on equity (ROE). We will use ROE to examine Enma Al Rawabi Investment & Real Estate Development Company (TADAWUL:9521), 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 other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for Enma Al Rawabi Investment & Real Estate Development
How do you 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 Enma Al Rawabi Investment & Real Estate Development is:
4.5% = ر.س22m ÷ ر.س493m (Based on the last twelve months to December 2021).
The “yield” is the amount earned after tax over the last twelve months. Another way to think about this is that for every 1 SAR worth of equity, the company was able to make a profit of 0.04 SAR.
Does Enma Al Rawabi Investment & Real Estate Development have a good ROE?
By comparing a company’s ROE with the average for its industry, we can get a quick measure of its quality. The limitation of this approach is that some companies are very different from others, even within the same industrial classification. If you look at the image below, you can see that Enma Al Rawabi Investment & Real Estate Development has a below average ROE (7.6%) in the real estate industry classification.
That’s not what we like to see. That being said, a low ROE is not always a bad thing, especially if the company has low debt, as it still leaves room for improvement if the company were to take on more debt. A highly leveraged company with a low ROE is a whole other story and a risky investment on our books. Our risk dashboard should have the 3 risks we have identified for Enma Al Rawabi Investment & Real Estate Development.
What is the impact of debt on return on equity?
Companies generally need to invest money to increase their profits. The money for the investment can come from the previous year’s earnings (retained earnings), from issuing new shares or from borrowing. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the debt necessary for growth will boost returns, but will not impact equity. This will make the ROE better than if no debt was used.
Enma Al Rawabi Investment & Real Estate Development’s debt and its ROE of 4.5%
Shareholders will be delighted to learn that Enma Al Rawabi Investment & Real Estate Development does not have an iota of net debt! It is difficult to say that its ROE is very good, but the fact that no debt has been used is a certain comfort. After all, when a company has a strong balance sheet, it can often find ways to invest in growth, even if it takes time.
Return on equity is useful for comparing the quality of different companies. Companies that can earn high returns on equity without too much debt are generally of good quality. 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.
But when a company is of high quality, the market often gives it a price that reflects that. Earnings growth rates, relative to expectations reflected in the share price, are particularly important to consider. So I think it’s worth checking it out free this detailed graph past profits, revenue and cash flow.
Sure Enma Al Rawabi Investment & Real Estate Development may not be the best stock to buy. So you might want to see this free collection of other companies that have high ROE and low debt.
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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.