U.S. markets closed
  • S&P 500

    4,141.59
    +13.60 (+0.33%)
     
  • Dow 30

    33,677.27
    -68.13 (-0.20%)
     
  • Nasdaq

    13,996.10
    +146.10 (+1.05%)
     
  • Russell 2000

    2,228.92
    -4.86 (-0.22%)
     
  • Crude Oil

    60.45
    +0.75 (+1.26%)
     
  • Gold

    1,745.90
    +13.20 (+0.76%)
     
  • Silver

    25.40
    +0.53 (+2.12%)
     
  • EUR/USD

    1.1949
    +0.0031 (+0.26%)
     
  • 10-Yr Bond

    1.6230
    -0.0520 (-3.10%)
     
  • GBP/USD

    1.3752
    +0.0009 (+0.07%)
     
  • USD/JPY

    109.0500
    -0.3260 (-0.30%)
     
  • BTC-USD

    63,220.07
    +3,031.31 (+5.04%)
     
  • CMC Crypto 200

    1,355.39
    +61.39 (+4.74%)
     
  • FTSE 100

    6,890.49
    +1.37 (+0.02%)
     
  • Nikkei 225

    29,751.61
    +212.88 (+0.72%)
     

Should We Be Cautious About Dominion Energy, Inc.'s (NYSE:D) ROE Of 4.7%?

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
Simply Wall St
·4 min read
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

One of the best investments we can make is in our own knowledge and skill set. With that in mind, this article will work through how we can use Return On Equity (ROE) to better understand a business. To keep the lesson grounded in practicality, we'll use ROE to better understand Dominion Energy, Inc. (NYSE:D).

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Dominion Energy

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 Dominion Energy is:

4.7% = US$1.3b ÷ US$28b (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.05.

Does Dominion Energy Have A Good Return On Equity?

One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. If you look at the image below, you can see Dominion Energy has a lower ROE than the average (9.2%) in the Integrated Utilities industry classification.

roe
roe

That certainly isn't ideal. That being said, a low ROE is not always a bad thing, especially if the company has low leverage as this still leaves room for improvement if the company were to take on more debt. A company with high debt levels and low ROE is a combination we like to avoid given the risk involved. You can see the 2 risks we have identified for Dominion Energy by visiting our risks dashboard for free on our platform here.

How Does Debt Impact ROE?

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 and second cases, the ROE will reflect this use of cash for investment in the business. 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 Dominion Energy's Debt And Its 4.7% Return On Equity

It's worth noting the high use of debt by Dominion Energy, leading to its debt to equity ratio of 1.37. With a fairly low ROE, and significant use of debt, it's hard to get excited about this business at the moment. Investors should think carefully about how a company might perform if it was unable to borrow so easily, because credit markets do change over time.

Summary

Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. In our books, the highest quality companies have high return on equity, despite low debt. If two companies have around the same level of debt to equity, and one has a higher ROE, I'd generally prefer the one with higher ROE.

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.

Of course Dominion Energy may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.

This article by Simply Wall St is general in nature. 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.

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