While some investors are already familiar with financial metrics (hat trick), this article is for those who want to learn more about return on equity (ROE) and why it matters. Learning by doing, we will look at ROE to better understand Kotyark Industries Limited (NSE: KOTYARK).
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
See our latest analysis for Kotyark Industries
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Kotyark Industries is:
32% = ₹86m ÷ ₹266m (Based on last twelve months to March 2022).
“Yield” refers to a company’s earnings over the past year. This therefore means that for every ₹1 of its shareholder’s investment, the company generates a profit of ₹0.32.
Does Kotyark Industries have a good return on equity?
By comparing a company’s ROE with the average for its industry, we can get a quick measure of its quality. However, this method is only useful as a rough check, as companies differ quite a bit within the same industry classification. As you can see in the graph below, Kotyark Industries has an above average ROE (17%) for the oil and gas industry.
That’s what we like to see. That said, a high ROE does not always mean high profitability. A higher proportion of debt in a company’s capital structure can also result in a high ROE, where high debt levels could be a huge risk. To learn about the 3 risks we have identified for Kotyark Industries, visit our Risk Dashboard for free.
The Importance of Debt to Return on Equity
Companies generally need to invest money to increase their profits. This money can come from retained earnings, issuing new stock (shares), or debt. In the first and second case, the ROE will reflect this use of cash for investment in the business. In the latter case, the use of debt will improve returns, but will not change equity. This will make the ROE better than if no debt was used.
Kotyark Industries debt and its 32% ROE
Kotyark Industries has a debt ratio of 0.14, which is far from excessive. The combination of modest debt and a very impressive ROE suggests that the company is of high quality. Judicious use of debt to improve returns can certainly be a good thing, even if it slightly increases risk and reduces future optionality.
Return on equity is a way to compare the business quality of different companies. Companies that can earn high returns on equity without too much debt are generally of good quality. All things being equal, a higher ROE is better.
But ROE is only one piece of a larger puzzle, as high-quality companies often trade on high earnings multiples. Earnings growth rates, relative to expectations reflected in the share price, are particularly important to consider. So I think it’s worth checking it out free this detailed graph past profits, revenue and cash flow.
Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.