Based on its ROE, is Manaksia Aluminum Company Limited (NSE: MANAKALUCO) high quality stock?
Many investors are still educating themselves about the various metrics that can be useful when analyzing a stock. This article is for those who want to learn more about return on equity (ROE). We will use the ROE to examine Manaksia Aluminum Company Limited (NSE: MANAKALUCO), using a real world example.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Discover our latest analysis for Manaksia Aluminum
How to calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE for Manaksia Aluminum is:
6.5% = â¹ 71m Ã· â¹ 1.1b (based on the last twelve months up to June 2021).
“Return” refers to a company’s profits over the past year. One way to conceptualize this is that for every 1 of share capital it has, the company has made â¹ 0.07 in profit.
Does Manaksia Aluminum have a good return on equity?
By comparing a company’s ROE with its industry average, we can get a quick measure of its quality. The limitation of this approach is that some companies are very different from others, even within the same industry classification. As shown in the image below, Manaksia Aluminum has a lower ROE than the average (15%) for the metals and mining industry.
Unfortunately, this is suboptimal. However, a low ROE is not always bad. If the company’s debt levels are moderate to low, there is still a chance that returns can be improved through the use of financial leverage. A heavily leveraged company with a low ROE is a whole different story and a risky investment on our books. Our risk dashboard should contain the 3 risks that we have identified for Manaksia Aluminum.
Why You Should Consider Debt When Looking At ROE
Most businesses need money – from somewhere – 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 debt used for growth will improve returns, but will not affect total equity. So, using debt can improve ROE, but with added risk in stormy weather, metaphorically speaking.
Combine Manaksia Aluminum’s debt and its return on equity of 6.5%
Manaksia Aluminum clearly uses a high amount of debt to increase returns, as it has a debt ratio of 1.08. The combination of a rather low ROE and a high recourse to debt is not particularly attractive. 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 way to compare the quality of the business of different companies. A business that can earn a high return on equity without going into debt could be considered a high quality business. All other things being equal, a higher ROE is preferable.
But when a company is of high quality, the market often offers it up to a price that reflects that. Especially important to consider are the growth rates of earnings, relative to expectations reflected in the stock price. So I think it’s worth checking this out free this detailed graphic past profits, income and cash flow.
If you would rather consult with another company – one with potentially superior finances – then don’t miss this free list of interesting companies, which have a HIGH return on equity and low leverage.
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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.
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