EPA:UG).” data-reactid=”27″ type=”text”>While some investors are already well versed in financial metrics (hat tip), this article is for those who would like to learn about Return On Equity (ROE) and why it is important. By way of learning-by-doing, we’ll look at ROE to gain a better understanding of Peugeot S.A. (EPA:UG).
How Do I Calculate Return On Equity?
Return on Equity=Net Profit ÷ Shareholders’ Equity
Or for Peugeot:
17%=€2.8b ÷ €20b (Based on the trailing twelve months to December 2018.)
Most readers would understand what net profit is, but it’s worth explaining the concept of shareholders’ equity. It is all the money paid into the company from shareholders, plus any earnings retained. Shareholders’ equity can be calculated by subtracting the total liabilities of the company from the total assets of the company.
What Does ROE Mean?
Does Peugeot Have A Good Return On Equity?
One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. As you can see in the graphic below, Peugeot has a higher ROE than the average (10%) in the Auto industry.
you might check if insiders are buying shares.” data-reactid=”52″ type=”text”>That’s clearly a positive. In my book, a high ROE almost always warrants a closer look. For exampleyou might checkif insiders are buying shares.
How Does Debt Impact ROE?
Most companies need money — from somewhere — to grow their profits. That cash can come from issuing shares, retained earnings, 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 debt used for growth will improve returns, but won’t affect the total equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.
Peugeot’s Debt And Its 17% ROE
Although Peugeot does use debt, its debt to equity ratio of 0.40 is still low. The fact that it achieved a fairly good ROE with only modest debt suggests the business might be worth putting on your watchlist. Conservative use of debt to boost returns is usually a good move for shareholders, though it does leave the company more exposed to interest rate rises.
The Key Takeaway
Return on equity is useful for comparing the quality of different businesses. In my book the highest quality companies have high return on equity, despite low debt. All else being equal, a higher ROE is better.
visualization of analyst forecasts for the company.” data-reactid=”59″ type=”text”>Having said that, while ROE is a useful indicator of business quality, you’ll have to look at a whole range of factors to determine the right price to buy a stock. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So you might want to check this FREEvisualization of analyst forecasts for the company.
freecollection of other companies that have high ROE and low debt.” data-reactid=”64″ type=”text”>Of coursePeugeot may not be the best stock to buy. So you may wish to see thisfreecollection of other companies that have high ROE and low debt.
If you spot an error that warrants correction, please contact the editor at[email protected]. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.” data-reactid=”65″ type=”text”>
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at[email protected]. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.