我们对艾伯森公司（NYSE:ACI）38%的roe应该感到高兴吗?

Oneofthebestinvestmentswecanmakeisinourownknowledgeandskillset.Withthatinmind,thisarticlewillworkthroughhowwecanuseReturnOnEquity(ROE)tobetterunderstandabusiness.We'lluseROEtoexamineAlbertsonsCompanies,Inc.(NYSE:ACI),bywayofaworkedexample.

ReturnonequityorROEisanimportantfactortobeconsideredbyashareholderbecauseittellsthemhoweffectivelytheircapitalisbeingreinvested.Inshort,ROEshowstheprofiteachdollargenerateswithrespecttoitsshareholderinvestments.

HowDoYouCalculateReturnOnEquity?

Theformulaforreturnonequityis:

ReturnonEquity=NetProfit(fromcontinuingoperations)÷Shareholders'Equity

So,basedontheaboveformula,theROEforAlbertsonsCompaniesis:

38%=US$1.1b÷US$2.9b(BasedonthetrailingtwelvemonthstoJune2024).

The'return'istheincomethebusinessearnedoverthelastyear.Anotherwaytothinkofthatisthatforevery$1worthofequity,thecompanywasabletoearn$0.38inprofit.

DoesAlbertsonsCompaniesHaveAGoodReturnOnEquity?

Bycomparingacompany'sROEwithitsindustryaverage,wecangetaquickmeasureofhowgooditis.Importantly,thisisfarfromaperfectmeasure,becausecompaniesdiffersignificantlywithinthesameindustryclassification.Pleasingly,AlbertsonsCompanieshasasuperiorROEthantheaverage(11%)intheConsumerRetailingindustry.

NYSE:ACIReturnonEquitySeptember10th2024

That'sclearlyapositive.Withthatsaid,ahighROEdoesn'talwaysindicatehighprofitability.Ahigherproportionofdebtinacompany'scapitalstructuremayalsoresultinahighROE,wherethehighdebtlevelscouldbeahugerisk.Youcanseethe2riskswehaveidentifiedforAlbertsonsCompaniesbyvisitingourrisksdashboardforfreeonourplatformhere.

HowDoesDebtImpactReturnOnEquity?

Mostcompaniesneedmoney--fromsomewhere--togrowtheirprofits.Thecashforinvestmentcancomefromprioryearprofits(retainedearnings),issuingnewshares,orborrowing.Inthefirsttwocases,theROEwillcapturethisuseofcapitaltogrow.Inthelattercase,thedebtrequiredforgrowthwillboostreturns,butwillnotimpacttheshareholders'equity.InthismannertheuseofdebtwillboostROE,eventhoughthecoreeconomicsofthebusinessstaythesame.

AlbertsonsCompanies'DebtAndIts38%ROE

AlbertsonsCompaniesclearlyusesahighamountofdebttoboostreturns,asithasadebttoequityratioof2.54.ItsROEisprettyimpressivebut,itwouldhaveprobablybeenlowerwithouttheuseofdebt.Debtincreasesriskandreducesoptionsforthecompanyinthefuture,soyougenerallywanttoseesomegoodreturnsfromusingit.

Conclusion

Returnonequityisusefulforcomparingthequalityofdifferentbusinesses.Acompanythatcanachieveahighreturnonequitywithoutdebtcouldbeconsideredahighqualitybusiness.IftwocompanieshavethesameROE,thenIwouldgenerallyprefertheonewithlessdebt.

ButROEisjustonepieceofabiggerpuzzle,sincehighqualitybusinessesoftentradeonhighmultiplesofearnings.Profitgrowthrates,versustheexpectationsreflectedinthepriceofthestock,areaparticularlyimportanttoconsider.SoIthinkitmaybeworthcheckingthisfreereportonanalystforecastsforthecompany.

Butnote:AlbertsonsCompaniesmaynotbethebeststocktobuy.SotakeapeekatthisfreelistofinterestingcompanieswithhighROEandlowdebt.

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ThisarticlebySimplyWallStisgeneralinnature.Weprovidecommentarybasedonhistoricaldataandanalystforecastsonlyusinganunbiasedmethodologyandourarticlesarenotintendedtobefinancialadvice.Itdoesnotconstitutearecommendationtobuyorsellanystock,anddoesnottakeaccountofyourobjectives,oryourfinancialsituation.Weaimtobringyoulong-termfocusedanalysisdrivenbyfundamentaldata.Notethatouranalysismaynotfactorinthelatestprice-sensitivecompanyannouncementsorqualitativematerial.SimplyWallSthasnopositioninanystocksmentioned.