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). In a learning-by-doing manner, we will look at ROE to gain a better understanding of Adani Ports and Special Economic Zones Limited (NSE:ADANIPORTS).
Return on equity or ROE is the primary measure used to assess how efficiently a company’s management is using the company’s capital. Simply put, it is used to assess a company’s profitability in relation to its equity capital.
Check opportunities and risks in the IN Infrastructure industry.
How Do You Calculate Return on Equity?
The formula for return on equity is:
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% = ₹46b ÷ ₹386b (Based on trailing twelve months to June 2022).
‘Returns’ are profits over the past twelve months. 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. As is clear from the image below, Adani Ports and Special Economic Zones have a better than average ROE (7.1%) in the Infrastructure industry.
That is clearly positive. Thus, a high ROE does not always indicate a high profit. 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. Our risk dashboard should have the 3 risks we have identified for Adani Ports and Special Economic Zones.
How Does Debt Impact Return On Equity?
Most companies need money — from somewhere — to grow their profits. That cash can come from retained earnings, issuing new shares (equity) or debt. In the first two cases, ROE will capture the use of this capital to grow. In the second case, the debt required for growth will increase returns, but will not affect shareholder equity. Therefore, the use of debt can increase ROE, although along with additional risk in case of stormy weather, metaphorically speaking.
Combining Adani Ports and Special Economic Zone Debt with a 12% Return on Equity
Adani Ports and Special Economic Zone is clearly using a high amount of debt to increase returns, as it has a debt to equity ratio of 1.24. With a relatively low ROE and significant debt utilization, it’s hard to get excited about this business right now. Debt increases risk and reduces options for the company in the future, so you usually want to see some good returns from using it.
Return on equity is one way we can compare the quality of its business with different companies. 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. It’s important to consider other factors, such as future profit growth — and the amount of investment required in the future. So I thought it might be worth checking this out free reports analyst forecasts for companies.
Of course, you may find a great investment by looking elsewhere. So look at this free list of interesting companies.
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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.