Many investors are still educating themselves about the various metrics that can be useful when analyzing a stock. This article is for those who want to learn more about return on equity (ROE). As a learning by doing, we will look at the ROE to better understand Ataa Educational Company (TADAWUL: 4292).
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for Ataa Educational
How is the ROE calculated?
the formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Ataa Educational is:
11% = ر.س 98 m ÷ ر.س 888 m (Based on the last twelve months up to October 2021).
The “return” is the income the business has earned over the past year. This therefore means that for each SAR1 of its shareholder’s investments, the company generates a profit of SAR0.11.
Does Ataa Educational have a good return on equity?
By comparing a company’s ROE with its industry average, we can get a quick measure of its quality. However, this method is only useful as a rough check, as companies differ a lot within a single industry classification. The image below shows that Ataa Educational has an ROE that is roughly in line with the consumer service industry average (9.7%).
It is neither particularly good nor bad. While at least the ROE is not lower than that of the industry, it is still worth checking out the role that corporate debt plays, as high levels of debt relative to equity can also make the ROE appear high. If this is true, it is more an indication of risk than potential.
Why You Should Consider Debt When Looking At ROE
Almost all businesses need money to invest in the business, 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 used for growth will improve returns, but will not affect total equity. So, using debt can improve ROE, but with added risk in stormy weather, metaphorically speaking.
Combine Ata Educational Debt and Its Return on Equity of 11%
Ataa Educational clearly uses a high amount of debt to increase returns, as it has a debt ratio of 1.07. With a fairly low ROE and heavy use of debt, it’s hard to get excited about this business right now. Debt comes with additional risk, so it’s only really worth it when a business is making decent returns from it.
Return on equity is a way to compare the business quality of different companies. A business that can earn a high return on equity without going into debt can be considered a high quality business. If two companies have the same ROE, 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 stock price. So I think it’s worth checking this out free analyst forecast report for the company.
Sure Ataa Educational may not be the best stock to buy. So you might want to see this free collection of other companies with high ROE and low leverage.
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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 any stock 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 documents. Simply Wall St has no position in any of the stocks mentioned.