Adani Ports and Special Economic Zones Limited (NSE:ADANIPORTS) Delivers Better ROE Than Its Industry | Whuff News


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). We will use ROE to examine Adani Ports and Special Economic Zone Limited (NSE:ADANIPORTS), through an effective example.

Return on equity or ROE is an important factor for shareholders to consider because it tells them how effectively their capital is being reinvested. Simply put, ROE shows the profit generated per dollar with respect to its shareholders’ investment.

Check out our latest analysis for Adani Ports and Special Economic Zones

How to Calculate Return on Equity?

Return on equity can be calculated using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Adani Port and Special Economic Zone is:

12% = ₹48b ÷ ₹386b (Based on trailing twelve months to March 2022).

‘Return’ refers to the company’s earnings over the last year. This means that for every ₹1 worth of shareholder equity, the company generates a profit of ₹0.12.

Do Adani Ports and Special Economic Zones Have Good ROE?

An easy way to determine whether a company has a good return on equity is to compare it to the average for its industry. A limitation of this approach is that some companies are quite different from others, even within the same industry classification. Happily, Adani Ports and Special Economic Zones have a higher than average ROE (6.2%) in the Infrastructure industry.

roe
Return on Equity NSEI:ADANIPORTS 1 July 2022

That’s what we like to see. However, keep in mind that a high ROE does not necessarily indicate efficient profit generation. A higher share of debt in a company’s capital structure can also result in a high ROE, where a high level of debt can be a big risk. To find out the 4 risks we have identified for Adani Ports and Special Economic Zones, visit our risk dashboard for free.

How Does Debt Impact ROE?

Most companies need money — from somewhere — to grow their profits. Cash for investment can come from previous year’s profits (retained earnings), issue new shares or borrow. In the first and second cases, ROE will reflect the use of this cash for investment in the business. In the second case, the use of debt will increase returns, but will not change equity. That will make ROE look better than if no debt was used.

Combining Adani Ports and Special Economic Zone Debt with a 12% Return on Equity

Adani Ports and Special Economic Zones do use high amounts of debt to increase returns. It has a debt to equity ratio of 1.18. Its ROE is relatively low, even with the significant use of debt; that’s not a good decision, in our opinion. Debt does carry additional risk, so it’s only worth it when the company generates some decent returns from it.

Summary

Return on equity is useful for comparing the quality of different businesses. A company that can achieve a high return on equity without debt can be considered a high quality business. If two companies have roughly the same level of debt to equity, and one company has a higher ROE, I generally prefer the company with the higher ROE.

But when a business is of high quality, the market often bids it to a price that reflects this. The rate at which profits are likely to grow, compared to the expected profit growth reflected in current prices, must be considered as well. So you might want to check out this FREE analyst forecast visualization for companies.

Of course, you may find a great investment by looking elsewhere. So look at this free list of interesting companies.

Valuation is complicated, but we help make it simple.

Find out if Adani Port and Special Economic Zone potential over or under value by reviewing our comprehensive analysis, which includes fair value estimation, risk and warning, dividends, insider trading and financial health.

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This article by Simply Wall St is general in nature. We provide reviews based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any shares, and does not take into account your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.



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