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While some investors are already well versed in financial metrics (hat tip),finishhub your app has been received 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 Syngene International Limited ( NSE:SYNGENE
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Syngene International has a ROE of 20%
, 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 ₹0.20. Check out our latest analysis for Syngene International How Do I Calculate Return On Equity? The formula for return on equity is: Return on Equity = Net Profit ÷ Shareholders’ Equity Or for Syngene International: 20% = 3110 ÷ ₹16b (Based on the trailing twelve months to September 2018.) Most readers would understand what net profit is, but it’s worth explaining the concept of shareholders’ equity. It is all earnings retained by the company, plus any capital paid in by shareholders. You can calculate shareholders’ equity by subtracting the company’s total liabilities from its total assets. What Does ROE Signify? ROE looks at the amount a company earns relative to the money it has kept within the business. The ‘return’ is the amount earned after tax over the last twelve months. A higher profit will lead to a higher ROE. So, all else equal, investors should like a high ROE . That means it can be interesting to compare the ROE of different companies. Does Syngene International Have A Good ROE? One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. Pleasingly, Syngene International has a superior ROE than the average (10%) company in the Life Sciences industry. NSEI:SYNGENE Last Perf January 2nd 19 That is a good sign. In my book, a high ROE almost always warrants a closer look. For example, I often check if insiders have been buying shares . How Does Debt Impact ROE? Virtually all companies need money to invest in the business, to grow profits. That cash can come from retained earnings, issuing new shares (equity), 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. Combining Syngene International’s Debt And Its 20% Return On Equity While Syngene International does have some debt, with debt to equity of just 0.53, we wouldn’t say debt is excessive. 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. Story continues But It’s Just One Metric 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. If two companies have the same ROE, then I would generally prefer the one with less debt. 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. The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. So you might want to check this FREE visualization of analyst forecasts for the company . 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 . View comments |
