U.S. Markets close in 2 hrs 59 mins
  • S&P 500

    4,154.23
    -31.24 (-0.75%)
     
  • Dow 30

    33,999.04
    -201.63 (-0.59%)
     
  • Nasdaq

    13,864.61
    -187.73 (-1.34%)
     
  • Russell 2000

    2,220.76
    -41.91 (-1.85%)
     
  • Crude Oil

    63.28
    +0.15 (+0.24%)
     
  • Gold

    1,771.70
    -8.50 (-0.48%)
     
  • Silver

    25.78
    -0.32 (-1.24%)
     
  • EUR/USD

    1.2042
    +0.0062 (+0.5178%)
     
  • 10-Yr Bond

    1.5910
    +0.0180 (+1.14%)
     
  • Vix

    18.50
    +2.25 (+13.85%)
     
  • GBP/USD

    1.3988
    +0.0148 (+1.0687%)
     
  • USD/JPY

    108.0490
    -0.7340 (-0.6747%)
     
  • BTC-USD

    54,853.93
    -626.31 (-1.13%)
     
  • CMC Crypto 200

    1,233.83
    -65.13 (-5.01%)
     
  • FTSE 100

    7,000.08
    -19.45 (-0.28%)
     
  • Nikkei 225

    29,685.37
    +2.00 (+0.01%)
     

Should You Be Concerned About Zumtobel Group AG's (VIE:ZAG) ROE?

  • 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 Zumtobel Group AG (VIE:ZAG).

Over the last twelve months Zumtobel Group has recorded a ROE of 4.7%. That means that for every €1 worth of shareholders' equity, it generated €0.05 in profit.

See our latest analysis for Zumtobel Group

How Do I Calculate ROE?

The formula for ROE is:

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

Or for Zumtobel Group:

4.7% = €13m ÷ €278m (Based on the trailing twelve months to January 2020.)

It's easy to understand the 'net profit' part of that equation, but 'shareholders' equity' requires further explanation. It is all the money paid into the company from shareholders, plus any earnings retained. The easiest way to calculate shareholders' equity is to subtract the company's total liabilities from the total assets.

What Does Return On Equity Mean?

ROE measures a company's profitability against the profit it retains, and any outside investments. The 'return' is the profit over the last twelve months. A higher profit will lead to a higher ROE. So, as a general rule, a high ROE is a good thing. That means ROE can be used to compare two businesses.

Does Zumtobel Group Have A Good Return On Equity?

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. As is clear from the image below, Zumtobel Group has a lower ROE than the average (11%) in the Electrical industry.

WBAG:ZAG Past Revenue and Net Income March 31st 2020
WBAG:ZAG Past Revenue and Net Income March 31st 2020

Unfortunately, that's sub-optimal. We'd prefer see an ROE above the industry average, but it might not matter if the company is undervalued. Still, shareholders might want to check if insiders have been selling.

Why You Should Consider Debt When Looking At ROE

Companies usually need to invest money to grow their profits. That cash can come from issuing shares, retained earnings, or debt. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the use of debt will improve the returns, but will not change the equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.

Zumtobel Group's Debt And Its 4.7% ROE

While Zumtobel Group does have some debt, with debt to equity of just 0.56, we wouldn't say debt is excessive. Although the ROE isn't overly impressive, the debt load is modest, suggesting the business has potential. Conservative use of debt to boost returns is usually a good move for shareholders, though it does leave the company more exposed to interest rate rises.

The Key Takeaway

Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. In my book the highest quality companies have high return on equity, despite low debt. If two companies have the same ROE, then I would generally prefer the one with less debt.

Having said that, while ROE is a useful indicator of business quality, you'll have to look at a whole range of factors to determine the right price to buy a stock. 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 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.