Many investors are still learning about the various metrics that can be useful when analyzing a stock. This article is for those who would like to learn about return on equity (ROE). As a hands-on learning, we will analyze ROE to gain a better understanding of DFI Retail Group Holdings Limited (SGX:D01).
Return on equity or ROE is a key measure used to assess how efficiently a company’s management uses the company’s capital. Put another way, it reveals the company’s success in turning shareholders’ investments into profits.
How to calculate return on capital?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Stockholders’ equity
So, based on the formula above, the ROE for DFI Retail Group Holdings is:
1.4% = $14 million ÷ $1 billion (based on the last twelve months through June 2022).
‘Yield’ refers to a company’s earnings over the last year. So this means that for every $1 of its shareholders’ investments, the company generates a profit of $0.01.
Does DFI Retail Group Holdings have a good ROE?
By comparing a company’s ROE to the industry average, we can get a quick measure of how good it is. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. As is clear from the image below, DFI Retail Group Holdings has a lower than average ROE (3.8%) in the Consumer retail industry.
That is certainly not ideal. 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 could be improved through the use of financial leverage. When a company has a low ROE but high levels of debt, we must be cautious as the risk involved is too high. To learn about the 4 risks we have identified for DFI Retail Group Holdings visit our free risk board
Why you should consider debt when analyzing ROE
Most companies need money, from somewhere, to increase their profits. That cash can come from retained earnings, issuance of new shares (equity), or debt. In the first two cases, ROE will capture this use of capital for growth. In the latter case, debt used for growth will improve returns but will not affect total wealth. In this way, the use of debt will boost ROE, even though the core economics of the business remain the same.
DFI Retail Group Holdings’ debt and ROE of 1.4%
It is worth noting the high use of debt by DFI Retail Group Holdings, leading to its debt-to-equity ratio of 1.21. With a fairly low ROE and significant use of debt, it’s hard to get excited about this business right now. Debt carries additional risk, so it’s only really worth it when a company generates some decent returns from it.
Return on capital is one way we can compare the trading quality of different companies. In our books, the highest quality companies have a high return on equity, despite low debt. If two companies have roughly the same level of debt to equity and one has a higher ROE, I generally prefer the one with a higher ROE.
That said, while ROE is a useful indicator of business quality, you’ll need to consider a wide range of factors to determine the right price to buy a stock. The rate at which earnings are likely to grow, relative to earnings growth expectations reflected in current pricing, should also be considered. So you might want to take a look at this interactive chart rich in forecasting data for the enterprise.
Of course, you can find a fantastic investment if you look elsewhere. so take a look at this free list of interesting companies.
Do you have comments about this article? Concerned about the content? Get in touch with us directly. Alternatively, email the editorial team (at) Simplywallst.com.
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 as financial advice. It is not a recommendation to buy or sell any stock, and it does not take into account your goals or financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please 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 any of the stocks mentioned.
Titration is complex, but we’re helping to simplify it.
find out if DFI Retail Group Holdings is potentially overvalued or undervalued by consulting our comprehensive analysis, which includes fair value estimates, risks and caveats, dividends, internal transactions and financial health.