While some investors are already familiar with financial metrics (hat tip), this article is aimed at those who want to learn more about Return On Equity (ROE) and why it matters. To put the lesson in practice, we’ll be using ROE to start Hagag Group Real Estate Entrepreneurship Ltd. (TLV: HGG) better to understand.
Return on Equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. In other words, it shows the company’s success in converting shareholder investments into profits.
Check out our latest analysis for Hagag Group Real Estate Entrepreneurship
How to calculate the return on equity
The Formula for the return on equity is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
Based on the formula above, the ROE for the Hagag Group’s real estate company is:
6.0% = 33 million ÷ 552 m (based on the last twelve months up to September 2020).
The “return” is the amount earned after tax over the past twelve months. This means that for every equity value of 1 ₪, the company will make a profit of 0.06. Scored.
Does Hagag Group’s real estate company have a good return on equity?
Perhaps the easiest way to evaluate a company’s ROE is to compare it to the average for its industry. However, this method is only useful as a rough check as companies differ significantly within the same industry classification. If you look at the image below, you can see that Hagag Group’s real estate company has a lower ROE than the average (9.8%) in the real estate industry classification.
TASE: HGG return on equity February 8, 2021
We don’t like to see that. However, a low ROE isn’t always bad. If the company’s debt is moderate to low, there is still a chance that the use of financial leverage can improve returns. A heavily indebted company with a low ROE is a whole different story and a risky investment in our books. You can see the 3 risks we have identified for Hagag Group’s real estate company by visiting our free risk dashboard on our platform here.
Why You Should Consider Debt When Looking At ROE
Most businesses need money – from somewhere – to grow their profits. The money for investments can come from profits of the previous year (retained earnings), the issue of new shares or the taking out of loans. For the first and second options, the ROE will reflect this use of cash for growth. In the latter case, using debt will improve returns but will not change equity. Thus, using debt can improve ROE, albeit metaphorically an additional risk in stormy weather.
Hagag Group Real Estate Entrepreneurship debt and ROE of 6.0%
The Hagel Group Real Estate Entrepreneurship clearly uses high levels of debt to increase returns as it has a leverage ratio of 1.40. With a relatively low ROE and significant use of debt, this business is difficult to get excited about right now. Investors should carefully consider how a company could do if it couldn’t borrow easily, as credit markets change over time.
Return on equity is useful for comparing the quality of different companies. Companies that can achieve high returns on equity without excessive debt are usually of good quality. When everything else is the same, a higher ROE is better.
But when a company is of high quality, the market often offers it up to a price that reflects it. It’s important to consider other factors, such as future earnings growth – and how much investment will be required in the future. I think this might be worth checking out free This detailed graphic of profit, sales and cash flow of the past.
Naturally Hagag Group Real Estate Entrepreneurship may not be the best stock to buy. You might want to see that free Collection of other companies with high ROE and low debt.
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