Advertisement
U.S. markets open in 35 minutes
  • S&P Futures

    5,304.50
    -3.75 (-0.07%)
     
  • Dow Futures

    40,152.00
    +8.00 (+0.02%)
     
  • Nasdaq Futures

    18,483.50
    -20.25 (-0.11%)
     
  • Russell 2000 Futures

    2,138.90
    +0.50 (+0.02%)
     
  • Crude Oil

    82.71
    +1.36 (+1.67%)
     
  • Gold

    2,228.20
    +15.50 (+0.70%)
     
  • Silver

    24.67
    -0.08 (-0.33%)
     
  • EUR/USD

    1.0799
    -0.0030 (-0.28%)
     
  • 10-Yr Bond

    4.2180
    +0.0220 (+0.52%)
     
  • Vix

    12.99
    +0.21 (+1.64%)
     
  • GBP/USD

    1.2630
    -0.0008 (-0.07%)
     
  • USD/JPY

    151.2400
    -0.0060 (-0.00%)
     
  • Bitcoin USD

    70,400.50
    +330.82 (+0.47%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,955.49
    +23.51 (+0.30%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

Is CEVA, Inc.’s (NASDAQ:CEVA) ROE Of 0.6% Concerning?

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). To keep the lesson grounded in practicality, we’ll use ROE to better understand CEVA, Inc. (NASDAQ:CEVA).

Our data shows CEVA has a return on equity of 0.6% for the last year. One way to conceptualize this, is that for each $1 of shareholders’ equity it has, the company made $0.0059 in profit.

See our latest analysis for CEVA

How Do I Calculate ROE?

The formula for return on equity is:

Return on Equity = Net Profit ÷ Shareholders’ Equity

Or for CEVA:

0.6% = 1.434 ÷ US$244m (Based on the trailing twelve months to September 2018.)

Most readers would understand what net profit is, but it’s worth explaining the concept of shareholders’ equity. It is the capital paid in by shareholders, plus any retained earnings. The easiest way to calculate shareholders’ equity is to subtract the company’s total liabilities from the total assets.

What Does ROE Mean?

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 amount earned after tax over the last twelve months. That means that the higher the ROE, the more profitable the company is. So, all else being equal, a high ROE is better than a low one. Clearly, then, one can use ROE to compare different companies.

Does CEVA 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. 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 CEVA has a lower ROE than the average (16%) in the Semiconductor industry classification.

NasdaqGS:CEVA Last Perf December 25th 18
NasdaqGS:CEVA Last Perf December 25th 18

That’s not what we like to see. It is better when the ROE is above industry average, but a low one doesn’t necessarily mean the business is overpriced. Nonetheless, it could be useful to double-check if insiders have sold shares recently.

How Does Debt Impact Return On Equity?

Virtually all companies need money to invest in the business, to grow profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. 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 required for growth will boost returns, but will not impact the shareholders’ equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.

Combining CEVA’s Debt And Its 0.6% Return On Equity

One positive for shareholders is that CEVA does not have any net debt! Without a doubt it has a fairly low ROE, but that isn’t so bad when you consider it has no debt. After all, with cash on the balance sheet, a company has a lot more optionality in good times and bad.

The Bottom Line On ROE

Return on equity is one way we can compare the business quality of different companies. A company that can achieve a high return on equity without debt could be considered a high quality business. 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. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.

Of course CEVA 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.

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