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 YH Dimri Construction & Development Ltd (TLV:DIMRI).
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 reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for YH Dimri Construction & Development
How to calculate return on equity?
the return on equity formula East:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for YH Dimri Construction & Development is:
15% = ₪216 million ÷ ₪1.4 billion (based on the last twelve months to September 2021).
The “yield” is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every ₪1 of share capital it has, the company has made a profit of 0.15₪.
Does YH Dimri Construction & Development 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. It is important to note that this measure is far from perfect, as companies differ significantly within the same industry classification. Fortunately, YH Dimri Construction & Development has an ROE above the average (12%) of the real estate sector.
It’s a good sign. Keep in mind that a high ROE does not always mean superior financial performance. In addition to changes in net income, a high ROE can also be the result of high debt to equity, which indicates risk.
What is the impact of debt on return on equity?
Virtually all businesses need money to invest in the business, to increase their profits. The money for the investment can come from the previous year’s earnings (retained earnings), from issuing new shares or from borrowing. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the debt necessary for growth will boost returns, but will not impact equity. In this way, the use of debt will increase ROE, even though the core economics of the business remains the same.
YH Dimri Construction & Development’s debt and its ROE of 15%
YH Dimri Construction & Development uses a high amount of debt to increase returns. Its debt to equity ratio is 1.66. While its ROE is respectable, it’s worth bearing in mind that there’s usually a limit to the amount of debt a company can use. Investors need to think carefully about how a company would perform if it weren’t able to borrow so easily, as credit markets change over time.
Summary
Return on equity is useful for comparing the 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 when a company is of high quality, the market often gives it a price that reflects that. It is important to consider other factors, such as future earnings growth and the amount of investment needed in the future. So I think it’s worth checking it out free this detailed graph past profits, revenue and cash flow.
Sure YH Dimri Construction & Development may not be the best stock to buy. So you might want to see this free collection of other companies that have high ROE and low debt.
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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.
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