Many investors are still learning about the various metrics that can be useful when analysing a stock. This how much beta alanine in bucked up energy drinkarticle 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 Shubhlaxmi Jewel Art Limited (

NSE:SHUBHLAXMI

).

Shubhlaxmi Jewel Art has a ROE of 15%

, based on the last twelve months. Another way to think of that is that for every ₹1 worth of equity in the company, it was able to earn ₹0.15.

View our latest analysis for Shubhlaxmi Jewel Art

How Do I Calculate Return On Equity?

The

formula for ROE

is:

Return on Equity = Net Profit ÷ Shareholders’ Equity

Or for Shubhlaxmi Jewel Art:

15% = 8.243 ÷ ₹55m (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 the capital paid in by shareholders, plus any retained earnings. The easiest way to calculate shareholders’ equity is to subtract the company’s total liabilities from the total assets.

What Does Return On Equity 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 yearly profit. That means that the higher the ROE, the more profitable the company is. So, as a general rule,

a high ROE is a good thing

. That means ROE can be used to compare two businesses.

Does Shubhlaxmi Jewel Art 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. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. As is clear from the image below, Shubhlaxmi Jewel Art has a better ROE than the average (11%) in the Specialty Retail industry.

NSEI:SHUBHLAXMI Last Perf January 2nd 19

That’s clearly a positive. 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

.

Why You Should Consider Debt When Looking At ROE

Virtually all companies need money to invest in the business, to grow profits. That cash can come from issuing shares, retained earnings, or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt required for growth will boost returns, but will not impact the shareholders’ equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.

Story continues

Shubhlaxmi Jewel Art’s Debt And Its 15% ROE

Shubhlaxmi Jewel Art does use a significant amount of debt to increase returns. It has a debt to equity ratio of 1.69. While the ROE isn’t too bad, it would probably be a lot lower if the company was forced to reduce debt. Debt increases risk and reduces options for the company in the future, so you generally want to see some good returns from using it.

In Summary

Return on equity is useful for comparing the quality of different businesses. A company that can achieve a high return on equity without debt could be considered a high quality business. If two companies have the same ROE, then I would generally prefer the one with less debt.

But when a business is high quality, the market often bids it up to a price that reflects this. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. 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,

you might find a fantastic investment by looking elsewhere.

So take a peek at this

free

list of interesting companies.

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

[email protected]

.

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