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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). By way of learning-by-doing, we'll look at ROE to gain a better understanding of Sedlmayr Grund und Immobilien AG (FRA:SPB).
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Sedlmayr Grund und Immobilien
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Sedlmayr Grund und Immobilien is:
6.2% = €17m ÷ €269m (Based on the trailing twelve months to March 2024).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.06 in profit.
Does Sedlmayr Grund und Immobilien Have A Good Return On Equity?
Arguably the easiest way to assess company's ROE is to compare it with the average in its industry. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. As shown in the graphic below, Sedlmayr Grund und Immobilien has a lower ROE than the average (8.1%) in the Real Estate industry classification.
Unfortunately, that's sub-optimal. That being said, a low ROE is not always a bad thing, especially if the company has low leverage as this still leaves room for improvement if the company were to take on more debt. When a company has low ROE but high debt levels, we would be cautious as the risk involved is too high. To know the 4 risks we have identified for Sedlmayr Grund und Immobilien visit our risks dashboard for free.
How Does Debt Impact ROE?
Most companies need money -- from somewhere -- to grow their profits. That cash can come from retained earnings, issuing new shares (equity), 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 the returns, but will not change the equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.
Combining Sedlmayr Grund und Immobilien's Debt And Its 6.2% Return On Equity
We think Sedlmayr Grund und Immobilien uses a significant amount of debt to maximize its returns, as it has a significantly higher debt to equity ratio of 3.11. We consider it to be a negative sign when a company has a rather low ROE despite a rather high debt to equity.