内容摘要：While some investors are already well versed in financial metrics (hat tip), this article is for tho is henry's hard soda discontinued

While some investors are already well versed in financial metrics (hat tip),is henry's hard soda discontinued this article is for those who would like to learn about Return On Equity (ROE) and why it is important. To keep the lesson grounded in practicality, we’ll use ROE to better understand The PRS REIT plc (

LON:PRSR

).

Our data shows

PRS REIT has a return on equity of 0.6%

for the last year. Another way to think of that is that for every £1 worth of equity in the company, it was able to earn £0.0061.

See our latest analysis for PRS REIT

How Do You Calculate Return On Equity?

The

formula for ROE

is:

Return on Equity = Net Profit ÷ Shareholders’ Equity

Or for PRS REIT:

0.6% = 2.988 ÷ UK£486m (Based on the trailing twelve months to June 2018.)

Most know that net profit is the total earnings after all expenses, but the concept of shareholders’ equity is a little more complicated. It is the capital paid in by shareholders, plus any retained earnings. Shareholders’ equity can be calculated by subtracting the total liabilities of the company from the total assets of the company.

What Does ROE Mean?

ROE looks at the amount a company earns relative to the money it has kept within the business. The ‘return’ is the profit over the last twelve months. A higher profit will lead to a higher ROE. So, all else being equal,

a high ROE is better than a low one

. That means ROE can be used to compare two businesses.

Does PRS REIT Have A Good Return On Equity?

Arguably the easiest way to assess company’s ROE is to compare it with the average in its industry. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. As shown in the graphic below, PRS REIT has a lower ROE than the average (8.4%) in the REITs industry classification.

LSE:PRSR Last Perf January 2nd 19

That certainly isn’t ideal. We’d prefer see an ROE above the industry average, but it might not matter if the company is undervalued. Nonetheless, it could be useful to

double-check if insiders have sold shares recently

.

How Does Debt Impact Return On Equity?

Companies usually need to invest money to grow their profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the use of debt will improve the returns, but will not change the equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.

Story continues

PRS REIT’s Debt And Its 0.6% ROE

PRS REIT is free of net debt, which is a positive for shareholders. It’s hard to argue its ROE is much good, but the fact that no debt was used is some comfort. After all, with cash on the balance sheet, a company has a lot more optionality in good times and bad.

The Key Takeaway

Return on equity is useful for comparing the quality of different businesses. Companies that can achieve high returns on equity without too much debt are generally of good quality. All else being equal, a higher ROE is better.

Having said that, while ROE is a useful indicator of business quality, you’ll have to look at a whole range of factors to determine the right price to buy a stock. The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. So you might want to take a peek at this

data-rich interactive graph of forecasts for the company

.

If you would prefer check out another company — one with potentially superior financials — then do not miss this

free

list of interesting companies, that have HIGH return on equity and low debt.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at

[email protected]

.

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