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 understand more about Rotshtein Realestate Ltd (TLV:ROTS), he takes a learn-by-doing look at ROE.
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 Rotshtein Realestate
How do I calculate return on equity?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, Rotshtein Realestate’s ROE is:
28% = ₪142m ÷ ₪510m (based on trailing 12 months to June 2023).
“Return” refers to a company’s earnings over the past year. This means that for every ₪1 of shareholders’ equity, the company generated ₪0.28 in profit.
Does Rotshtein Realestate have a good ROE?
One easy way to determine whether a company has a high return on equity is to compare it to the average for its industry. However, this method is only useful as a cursory check, as there is considerable variation between companies within the same industry classification. Pleasingly, Rotshtein Realestate has a better ROE than the average (11%) in the Real Estate industry.
That’s a good sign. Keep in mind that a high ROE does not necessarily mean good financial performance. The higher the proportion of debt in a company’s capital structure, the higher its ROE can be, and high debt levels can pose a major risk. Our risks dashboard should include his four risks that we have identified regarding Rotshtein Realestate.
What impact does debt have on ROE?
Businesses usually need to invest money to increase their profits. Cash for investments can come from previous years’ profits (retained earnings), issuing new shares, or borrowings. In his first two cases, ROE captures the use of capital for growth. In the latter case, using debt increases returns but does not change equity. So, figuratively speaking, the use of debt allows him to improve ROE, although it involves extra risk in case of stormy weather.
Rotshtein Realestate’s debt and ROE of 28%
Rotshtein Realestate’s heavy use of debt is notable, giving it a debt-to-equity ratio of 2.10. The ROE is pretty impressive, but it probably would have been lower if it didn’t have debt. Credit markets change over time, so investors should carefully consider how a company would perform if it could not borrow as easily.
conclusion
Return on equity helps you compare the quality of different businesses. Companies that can achieve high returns on equity without taking on large amounts of debt are generally of high quality. If two companies have the same ROE, I generally choose the one with less debt.
However, ROE is only one piece of a larger puzzle, as high quality companies often trade at high multiples of earnings. 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.
However, please note: Rotstein Real Estate may not be the best stock to buy.So take a look at this free List of interesting companies with high ROE and low debt.
Valuation is complex, but we help make it simple.
Check out our comprehensive analysis, including below, to see if Rotshtein Realestate is potentially overvalued or undervalued. Fair value estimates, risks and caveats, dividends, insider trading, and financial health.
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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.