Bilot Oyj (HEL: BILOT) achieved a lower ROE than its industry
While some investors are already familiar with financial metrics (hat tip), this article is for those who want to learn more about return on equity (ROE) and why it is important. As a learning by doing, we will look at the ROE to better understand Bilot Oyj (HEL: BILOT).
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how efficiently their capital is being reinvested. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
Check out our latest analysis for Bilot Oyj
How do you calculate return on equity?
the formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, Bilot Oyj’s ROE is:
3.0% = 585 K € ÷ 19 M € (Based on the last twelve months until June 2021).
“Return” refers to a company’s profits over the past year. This therefore means that for 1 € of investment by its shareholder, the company generates a profit of 0.03 €.
Does Bilot Oyj 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. The limitation of this approach is that some companies are very different from others, even within the same industry classification. If you look at the image below, you can see that Bilot Oyj has a lower than average ROE (18%) for the software industry classification.
It is certainly not ideal. That being said, a low ROE isn’t always a bad thing, especially if the business has low leverage as it still leaves room for improvement if the business were to take on more debt. A highly leveraged business with a low ROE is a whole different story and a risky investment on our books. You can see the 4 risks we have identified for Bilot Oyj 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 the issuance of shares, retained earnings or debt. In the first and second cases, the ROE will reflect this use of cash for investing in the business. In the latter case, the debt necessary for growth will increase returns, but will have no impact on equity. This will make the ROE better than if no debt was used.
Combine Bilot Oyj’s debt and its 3.0% return on equity
Although Bilot Oyj uses quite a bit of debt, his debt ratio of just 0.0042 is very low. Although the ROE is not very impressive, the leverage is modest, which suggests that the company has potential. The prudent use of debt to increase returns is generally a good thing for shareholders, even if it leaves the company more exposed to interest rate hikes.
Return on equity is useful for comparing the quality of different companies. Firms that can earn high returns on equity without taking on too much debt are generally of good quality. All other things being equal, a higher ROE is preferable.
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. You might want to take a look at this data-rich interactive chart of the forecast for the business.
Sure, you might find a fantastic investment looking elsewhere. So take a look at this free list of interesting companies.
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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 material. Simply Wall St has no position in any of the stocks mentioned.