Should you be excited about Crown Castle International Corp.’s 15% return on equity? (FPI) (NYSE: CCI)?
One of the best investments we can make is in our own knowledge and skills. With that in mind, this article will discuss how we can use Return on Equity (ROE) to better understand a business. To keep the lesson practical, we’ll use ROE to better understand Crown Castle International Corp. (REIT) (NYSE: CCI).
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
Check out our latest review for Crown Castle International (REIT)
How to calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of Crown Castle International (REIT) is:
15% = US $ 1.3 billion ÷ US $ 8.5 billion (based on the last twelve months to September 2021).
The “return” is the annual profit. Another way of thinking is that for every dollar of equity, the company was able to make $ 0.15 in profit.
Does Crown Castle International (FPI) have a good ROE?
Perhaps the easiest way to assess a company’s ROE is to compare it to the industry average. However, this method is only useful as a rough check, as companies differ a lot within the same industry classification. As you can see in the graph below, Crown Castle International (REIT) has an above-average ROE (5.8%) for the REIT industry.
It’s a good sign. That said, high ROE doesn’t always indicate high profitability. A higher proportion of debt in a company’s capital structure can also result in high ROE, where high debt levels could represent a huge risk. You can see the 3 risks we have identified for Crown Castle International (REIT) by visiting our risk dashboard for free on our platform here.
What is the impact of debt on return on equity?
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 two cases, the ROE will capture this use of capital to grow. In the latter case, the debt necessary for growth will increase returns, but will have no impact on equity. In this way, the use of debt will increase the ROE, even if the basic economy of the business remains the same.
Combine Crown Castle International (REIT) debt and its 15% return on equity
Noteworthy is Crown Castle International’s (REIT) high reliance on debt, resulting in a debt-to-equity ratio of 2.36. While his ROE is quite respectable, the amount of debt the company currently carries is not ideal. Leverage increases risk and reduces options for the business in the future, so you usually want to get good returns using it.
Conclusion
Return on equity is a useful indicator of a company’s ability to generate profits and return them to shareholders. In our books, the highest quality companies have a high return on equity, despite low leverage. If two companies have the same ROE, then I would generally prefer the one with the least amount of debt.
That said, while ROE is a useful indicator of how good a business is, you’ll need to look at a whole range of factors to determine the right price to buy a stock. Especially important to consider are the growth rates of earnings, relative to expectations reflected in the share price. So I think it’s worth checking this out free analyst forecast report for the company.
Sure, you might find a fantastic investment looking elsewhere. So take a look at this free list of interesting companies.
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 material. 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.
