While some investors are already familiar with financial metrics (hat tip), this article is for those who want to learn more about return on equity (ROE) and why it is important. To keep the lesson grounded in practice, we will use the ROE to better understand Unifique TelecomunicaÃ§Ãµes SA (BVMF: FIQE3).
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
Discover our latest analysis for Unifique TelecomunicaÃ§Ãµes
How is the ROE calculated?
The formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE for Unifique TelecomunicaÃ§Ãµes is:
50% = BRL 62 million Ã· BRL 124 million (based on the last twelve months up to June 2021).
“Return” refers to a company’s profits over the past year. Another way to look at this is that for every R $ 1 worth of equity, the company was able to earn R $ 0.50 in profit.
Does Unifique TelecomunicaÃ§Ãµes have a good return on equity?
A simple way to determine if a company has a good return on equity is to compare it to the average in its industry. However, this method is only useful as a rough check, as companies differ a lot within a single industry classification. Fortunately, Unifique TelecomunicaÃ§Ãµes has an above-average ROE (9.4%) for the telecommunications industry.
It’s a good sign. That said, high ROE doesn’t always indicate high profitability. Especially when a business uses high levels of leverage to finance its debt, which can increase its ROE, but high leverage puts the business at risk. You can see the 3 risks that we have identified for Unifique TelecomunicaÃ§Ãµes by visiting our risk dashboard for free on our platform here.
What is the impact of debt on ROE?
Businesses generally need to invest money to increase their profits. This liquidity can come from the issuance of shares, retained earnings or debt. In the first and second cases, the ROE will reflect this use of cash for investing in the business. In the latter case, the use of debt will improve returns, but will not affect equity. So, using debt can improve ROE, but with added risk in stormy weather, metaphorically speaking.
Combine the debt of Unifique TelecomunicaÃ§Ãµes and its return on equity of 50%
Noteworthy is Unifique TelecomunicaÃ§Ãµes’ high use of debt, resulting in a debt-to-equity ratio of 2.39. While there is no doubt that its ROE is impressive, we would have been even more impressed if the company had achieved this goal with lower debt. Investors should think carefully about how a business will perform if it weren’t able to borrow so easily, as credit markets change over time.
Return on equity is a useful indicator of a company’s ability to generate profits and return them to shareholders. A business that can earn a high return on equity without going into debt could be considered a high quality business. If two companies have the same ROE, then I would generally prefer the one with the least amount of debt.
But when a company is of high quality, the market often offers it up to a price that reflects that. It is important to take into account other factors, such as future profit growth and the amount of investment required for the future. You might want to take a look at this data-rich interactive chart of the forecast for the business.
Sure Unifique TelecomunicaÃ§Ãµes may not be the best stock to buy. So you might want to see this free collection of other companies with high ROE and low leverage.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.