Advertisement
U.S. markets close in 1 hour 42 minutes
  • S&P 500

    5,253.59
    +5.10 (+0.10%)
     
  • Dow 30

    39,787.09
    +27.01 (+0.07%)
     
  • Nasdaq

    16,380.76
    -18.76 (-0.11%)
     
  • Russell 2000

    2,123.69
    +9.34 (+0.44%)
     
  • Crude Oil

    82.97
    +1.62 (+1.99%)
     
  • Gold

    2,242.80
    +30.10 (+1.36%)
     
  • Silver

    25.00
    +0.25 (+1.02%)
     
  • EUR/USD

    1.0797
    -0.0033 (-0.30%)
     
  • 10-Yr Bond

    4.2020
    +0.0060 (+0.14%)
     
  • GBP/USD

    1.2623
    -0.0015 (-0.12%)
     
  • USD/JPY

    151.3980
    +0.1520 (+0.10%)
     
  • Bitcoin USD

    70,957.55
    +2,283.72 (+3.33%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

With A 4.7% Return On Equity, Is LogMeIn, Inc. (NASDAQ:LOGM) A Quality Stock?

Many investors are still learning about the various metrics that can be useful when analysing a stock. This article is for those who would like to learn about Return On Equity (ROE). By way of learning-by-doing, we’ll look at ROE to gain a better understanding of LogMeIn, Inc. (NASDAQ:LOGM).

LogMeIn has a ROE of 4.7%, based on the last twelve months. That means that for every $1 worth of shareholders’ equity, it generated $0.047 in profit.

See our latest analysis for LogMeIn

Want to help shape the future of investing tools and platforms? Take the survey and be part of one of the most advanced studies of stock market investors to date.

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit ÷ Shareholders’ Equity

Or for LogMeIn:

4.7% = 142.304 ÷ US$3.0b (Based on the trailing twelve months to September 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 all earnings retained by the company, plus any capital paid in by shareholders. Shareholders’ equity can be calculated by subtracting the total liabilities of the company from the total assets of the company.

What Does ROE Signify?

Return on Equity measures a company’s profitability against the profit it has kept for the business (plus any capital injections). The ‘return’ is the yearly profit. The higher the ROE, the more profit the company is making. So, all else equal, investors should like a high ROE. That means it can be interesting to compare the ROE of different companies.

Does LogMeIn Have A Good ROE?

By comparing a company’s ROE with its industry average, we can get a quick measure of how good it is. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. As is clear from the image below, LogMeIn has a lower ROE than the average (12%) in the Software industry.

NasdaqGS:LOGM Last Perf January 17th 19
NasdaqGS:LOGM Last Perf January 17th 19

Unfortunately, that’s sub-optimal. It is better when the ROE is above industry average, but a low one doesn’t necessarily mean the business is overpriced. Still, shareholders might want to check if insiders have been selling.

The Importance Of Debt To 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 first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt used for growth will improve returns, but won’t affect the total equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.

LogMeIn’s Debt And Its 4.7% ROE

Although LogMeIn does use a little debt, its debt to equity ratio of just 0.066 is very low. Its ROE is rather low, and it does use some debt, albeit not much. That’s not great to see. Judicious use of debt to improve returns can certainly be a good thing, although it does elevate risk slightly and reduce future optionality.

The Key Takeaway

Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. Companies that can achieve high returns on equity without too much debt are generally of good quality. If two companies have the same ROE, then I would generally prefer the one with less debt.

But when a business is high quality, the market often bids it up to a price that reflects this. It is important to consider other factors, such as future profit growth — and how much investment is required going forward. 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 editorial-team@simplywallst.com.

Advertisement