Many investors are still learning about the various metrics that can be useful when analyzing stocks. This article is for those who want to know about return on equity (ROE). To continue our practice-based lesson, let’s use ROE to better understand Internet Infinity, Inc. (TSE:6545).
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it receives from its shareholders. In other words, it is a profitability ratio that measures the rate of return on the capital provided by a company’s shareholders.
Check out our latest analysis for Internet Infinity.
How do you calculate return on equity?
Return on equity can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, Internet Infinity’s ROE is:
10% = 141 million yen ÷ 1.4 billion yen (based on the past 12 months to December 2023)
“Return” is the annual profit. In other words, for every 1 yen of shareholders’ equity, 0.10 yen of profit was generated.
Does Internet Infinity have a high return on equity?
One easy way to determine whether a company has a high return on equity is to compare it to the average for its industry. Importantly, this is far from a perfect measure, as companies vary widely even within the same industry classification. Looking at the chart below, we can see that internet infinity’s ROE is quite close to the average (9.0%) in the Healthcare industry.
That’s neither particularly good nor bad. ROE is similar to the industry, but we need to further check whether a company’s ROE is being boosted by high debt levels. If so, your exposure to financial risks increases. Please visit our website to learn about the two risks we have identified regarding Internet Infinity. risk dashboard It is available for free on this platform.
What impact does debt have on ROE?
Virtually all companies need money to invest in their business to grow profits. That cash can come from retained earnings, issuing new shares (equity), or debt. For the first and second options, ROE reflects the use of cash for growth. In the latter case, using debt increases returns but does not change equity. If we do that, our ROE will be better than if we didn’t take out debt.
Combine Internet Infinity’s debt with a 10% return on equity.
Internet Infinity’s debt-to-equity ratio of 0.63 is not excessive. The combination of modest debt and very good ROE suggests this is a business worth watching. Using debt judiciously to boost returns is often very beneficial to shareholders. However, this can reduce a company’s ability to take advantage of future opportunities.
summary
Return on equity is one way that you can compare the quality of business of different companies. A company that can achieve a high return on equity without debt can be said to be a high-quality company. If two companies have approximately the same level of debt-to-equity, but one company has a higher ROE, I usually prefer the company with the higher ROE.
That said, while ROE is a useful indicator of the quality of a business, you need to consider a variety of factors to determine the right price to buy a stock. Earnings growth rates and the expectations reflected in the share price are particularly important to consider.So I think it’s worth checking this free this Detailed graph Analysis of past earnings, revenue, and cash flow.
of course, You may find a great investment if you look elsewhere. So take a look at this free List of interesting companies.
Valuation is complex, but we help make it simple.
Check out our comprehensive analysis, including below, to see if Internet Infinity is potentially overvalued or undervalued. Fair value estimates, risks and caveats, dividends, insider trading, and financial health.
See free analysis
Have feedback on this article? Curious about its content? contact Please contact us directly. Alternatively, email our editorial team at Simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
