U.S. markets closed
  • S&P Futures

    4,137.00
    +9.25 (+0.22%)
     
  • Dow Futures

    33,762.00
    +53.00 (+0.16%)
     
  • Nasdaq Futures

    13,779.75
    +29.50 (+0.21%)
     
  • Russell 2000 Futures

    2,244.30
    +16.00 (+0.72%)
     
  • Crude Oil

    61.83
    +0.40 (+0.65%)
     
  • Gold

    1,786.40
    +4.40 (+0.25%)
     
  • Silver

    26.20
    +0.02 (+0.08%)
     
  • EUR/USD

    1.2024
    +0.0006 (+0.05%)
     
  • 10-Yr Bond

    1.5540
    -0.0100 (-0.64%)
     
  • Vix

    18.71
    +1.21 (+6.91%)
     
  • GBP/USD

    1.3857
    +0.0014 (+0.10%)
     
  • USD/JPY

    107.9230
    -0.0370 (-0.03%)
     
  • BTC-USD

    50,297.03
    -3,554.20 (-6.60%)
     
  • CMC Crypto 200

    1,145.21
    -97.84 (-7.87%)
     
  • FTSE 100

    6,938.24
    +42.95 (+0.62%)
     
  • Nikkei 225

    28,952.25
    -235.92 (-0.81%)
     

Is Service Corporation International (NYSE:SCI) A High Quality Stock To Own?

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

While some investors are already well versed in financial metrics (hat tip), this article is for those who would like to learn about Return On Equity (ROE) and why it is important. We'll use ROE to examine Service Corporation International (NYSE:SCI), by way of a worked example.

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 Service Corporation International

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 Service Corporation International is:

27% = US$462m ÷ US$1.7b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.27 in profit.

Does Service Corporation International 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, Service Corporation International has a better ROE than the average (6.5%) in the Consumer Services industry.

roe
roe

That's clearly a positive. However, bear in mind that a high ROE doesn’t necessarily indicate efficient profit generation. A higher proportion of debt in a company's capital structure may also result in a high ROE, where the high debt levels could be a huge risk . To know the 3 risks we have identified for Service Corporation International visit our risks dashboard for free.

The Importance Of Debt To Return On Equity

Most companies need money -- from somewhere -- 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 required for growth will boost returns, but will not impact the shareholders' equity. That will make the ROE look better than if no debt was used.

Combining Service Corporation International's Debt And Its 27% Return On Equity

Service Corporation International clearly uses a high amount of debt to boost returns, as it has a debt to equity ratio of 1.99. Its ROE is pretty impressive but, it would have probably been lower without the use of debt. 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 useful for comparing the quality of different businesses. 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.

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. It is important to consider other factors, such as future profit growth -- and how much investment is required going forward. So I think it may be worth checking this free report on analyst forecasts for the company.

But note: Service Corporation International may not be the best stock to buy. So take a peek at this free list of interesting companies with 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.