Many investors are still learning about the various metrics that can be useful when analysing a stock. This article is for those who would like to learn about Return On Equity (ROE). To keep the lesson grounded in practicality, we’ll use ROE to better understand Akg Exim Limited (NSE:AKG).
Our data shows Akg Exim has a return on equity of 8.5% for the last year. That means that for every ₹1 worth of shareholders’ equity, it generated ₹0.085 in profit.
See our latest analysis for Akg Exim
How Do I Calculate ROE?
The formula for ROE is:
Return on Equity = Net Profit ÷ Shareholders’ Equity
Or for Akg Exim:
8.5% = 10.209 ÷ ₹121m (Based on the trailing twelve months to March 2018.)
It’s easy to understand the ‘net profit’ part of that equation, but ‘shareholders’ equity’ requires further explanation. It is all earnings retained by the company, plus any capital paid in by shareholders. The easiest way to calculate shareholders’ equity is to subtract the company’s total liabilities from the total assets.
What Does ROE Mean?
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. That means that the higher the ROE, the more profitable the company is. So, all else equal, investors should like a high ROE. Clearly, then, one can use ROE to compare different companies.
Does Akg Exim 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. Pleasingly, Akg Exim has a superior ROE than the average (6.9%) company in the consumer retailing industry.
That’s what I like to see. I usually take a closer look when a company has a better ROE than industry peers. For example, I often check if insiders have been buying shares .
The Importance Of Debt To Return On Equity
Most companies need money — from somewhere — to grow their profits. That cash can come from issuing shares, retained earnings, or debt. In the first and second cases, the ROE will reflect this use of cash for investment in the business. In the latter case, the use of debt will improve the returns, but will not change the equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.
Akg Exim’s Debt And Its 8.5% ROE
Akg Exim clearly uses a significant amount debt to boost returns, as it has a debt to equity ratio of 2.18. Its ROE is quite low, even with the use of significant debt; that’s not a good result, in my opinion. Debt increases risk and reduces options for the company in the future, so you generally want to see some good returns from using it.