Consumer services

Should you be worried about Yduqs Participações SA’s 3.9% return on equity (BVMF: YDUQ3)?

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 Yduqs Participações SA (BVMF: YDUQ3).

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. Simply put, it is used to assess a company’s profitability against its equity.

See our latest analysis for Yduqs Participações

How to calculate return on equity?

the formula for ROE is:

Return on equity = Net income (from continuing operations) ÷ Equity

Thus, based on the above formula, the ROE for Yduqs Participações is:

3.9% = 130 million reais ÷ 3.3 billion reais (based on the last twelve months up to September 2021).

The “return” is the annual profit. This therefore means that for every R $ 1 of the investments of its shareholder, the company generates a profit of R $ 0.04.

Does Yduqs Participações have a good return on equity?

An easy way to determine if a company has a good return on equity is to compare it to the average in its industry. The limitation of this approach is that some companies are very different from others, even within the same industry classification. As shown in the image below, Yduqs Participações has a lower than average ROE (7.0%) for the consumer services sector.

BOVESPA: YDUQ3 Return on equity December 24, 2021

This is not what we like to see. However, we believe that a lower ROE could still mean that a company has the opportunity to improve its returns through the use of leverage, provided its existing leverage levels are low. A business with high debt levels and low ROE is a combination we like to avoid given the risk involved. You can see the 5 risks that we have identified for Yduqs Participações by visiting our risk dashboard for free on our platform here.

Why You Should Consider Debt When Looking At ROE

Businesses generally need to invest money to increase their profits. This liquidity can come from retained earnings, the issuance of new shares (equity) or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the use of debt will improve returns, but will not affect equity. This will make the ROE better than if no debt was used.

The debt of Yduqs Participações and its ROE of 3.9%

Yduqs Participações clearly uses a high amount of debt to increase returns, as it has a debt-to-equity ratio of 1.11. With a fairly low ROE and heavy use of debt, it’s hard to get excited about this business right now. 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. 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.

But ROE is only one piece of a bigger puzzle, as high-quality companies often trade at high earnings multiples. The rate at which earnings are likely to grow, relative to earnings growth expectations reflected in the current price, should also be taken into account. So you might want to check out this FREE visualization of analyst forecasts for the business.

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 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.