U.S. Markets open in 6 hrs 44 mins
  • S&P Futures

    4,003.75
    +0.50 (+0.01%)
     
  • Dow Futures

    34,007.00
    +21.00 (+0.06%)
     
  • Nasdaq Futures

    11,796.00
    -9.75 (-0.08%)
     
  • Russell 2000 Futures

    1,842.70
    +0.80 (+0.04%)
     
  • Crude Oil

    77.51
    +0.58 (+0.75%)
     
  • Gold

    1,782.50
    +1.20 (+0.07%)
     
  • Silver

    22.55
    +0.13 (+0.57%)
     
  • EUR/USD

    1.0491
    -0.0007 (-0.0629%)
     
  • 10-Yr Bond

    3.5990
    0.0000 (0.00%)
     
  • Vix

    20.75
    +1.69 (+8.87%)
     
  • GBP/USD

    1.2205
    +0.0011 (+0.0940%)
     
  • USD/JPY

    137.0500
    +0.3650 (+0.2670%)
     
  • BTC-USD

    17,007.39
    -325.83 (-1.88%)
     
  • CMC Crypto 200

    401.69
    -9.53 (-2.32%)
     
  • FTSE 100

    7,567.54
    +11.31 (+0.15%)
     
  • Nikkei 225

    27,885.87
    +65.47 (+0.24%)
     

What Bristol-Myers Squibb Company's (NYSE:BMY) ROE Can Tell Us

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 Bristol-Myers Squibb Company (NYSE:BMY).

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Bristol-Myers Squibb

How Is ROE Calculated?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Bristol-Myers Squibb is:

20% = US$6.6b ÷ US$33b (Based on the trailing twelve months to June 2022).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.20 in profit.

Does Bristol-Myers Squibb 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. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. You can see in the graphic below that Bristol-Myers Squibb has an ROE that is fairly close to the average for the Pharmaceuticals industry (19%).

roe
roe

That isn't amazing, but it is respectable. While at least the ROE is not lower than the industry, its still worth checking what role the company's debt plays as high debt levels relative to equity may also make the ROE appear high. If so, this increases its exposure to financial risk. To know the 3 risks we have identified for Bristol-Myers Squibb visit our risks dashboard for free.

How Does Debt Impact Return On Equity?

Companies usually need to invest money to grow their profits. That cash can come from retained earnings, issuing new shares (equity), or debt. 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.

Combining Bristol-Myers Squibb's Debt And Its 20% Return On Equity

It's worth noting the high use of debt by Bristol-Myers Squibb, leading to its debt to equity ratio of 1.29. There's no doubt its ROE is decent, but the very high debt the company carries is not too exciting to see. Debt increases risk and reduces options for the company in the future, so you generally want to see some good returns from using it.

Summary

Return on equity is one way we can compare its business quality of different companies. 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. 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 check this FREE visualization of analyst forecasts for the company.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of 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 factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here