Advertisement
U.S. markets open in 1 hour 19 minutes
  • S&P Futures

    5,307.25
    -1.00 (-0.02%)
     
  • Dow Futures

    40,156.00
    +12.00 (+0.03%)
     
  • Nasdaq Futures

    18,498.00
    -5.75 (-0.03%)
     
  • Russell 2000 Futures

    2,142.60
    +4.20 (+0.20%)
     
  • Crude Oil

    82.44
    +1.09 (+1.34%)
     
  • Gold

    2,231.80
    +19.10 (+0.86%)
     
  • Silver

    24.68
    -0.07 (-0.29%)
     
  • EUR/USD

    1.0792
    -0.0037 (-0.35%)
     
  • 10-Yr Bond

    4.1960
    0.0000 (0.00%)
     
  • Vix

    13.03
    +0.25 (+1.96%)
     
  • GBP/USD

    1.2621
    -0.0018 (-0.14%)
     
  • USD/JPY

    151.3400
    +0.0940 (+0.06%)
     
  • Bitcoin USD

    70,440.12
    +179.95 (+0.26%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.37
    +20.39 (+0.26%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

Curtis Banks Group plc (LON:CBP) Delivered A Better ROE Than Its Industry

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. By way of learning-by-doing, we'll look at ROE to gain a better understanding of Curtis Banks Group plc (LON:CBP).

Curtis Banks Group has a ROE of 16%, based on the last twelve months. Another way to think of that is that for every £1 worth of equity in the company, it was able to earn £0.16.

See our latest analysis for Curtis Banks Group

How Do You Calculate Return On Equity?

The formula for ROE is:

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

Or for Curtis Banks Group:

16% = UK£8.9m ÷ UK£55m (Based on the trailing twelve months to December 2019.)

Most know that net profit is the total earnings after all expenses, but the concept of shareholders' equity is a little more complicated. 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?

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 yearly profit. The higher the ROE, the more profit the company is making. So, as a general rule, a high ROE is a good thing. That means ROE can be used to compare two businesses.

Does Curtis Banks 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. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. As you can see in the graphic below, Curtis Banks Group has a higher ROE than the average (12%) in the Insurance industry.

AIM:CBP Past Revenue and Net Income March 30th 2020
AIM:CBP Past Revenue and Net Income March 30th 2020

That is a good sign. We think a high ROE, alone, is usually enough to justify further research into a company. One data point to check is if insiders have bought shares recently.

Why You Should Consider Debt When Looking At ROE

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. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.

Curtis Banks Group's Debt And Its 16% ROE

Curtis Banks Group clearly uses a significant amount of debt to boost returns, as it has a debt to equity ratio of 1.39. while its ROE is respectable, it is worth keeping in mind that there is usually a limit to how much debt a company can use. Debt does bring extra risk, so it's only really worthwhile when a company generates some decent returns from it.

The Key Takeaway

Return on equity is one way we can compare the business quality of different companies. Companies that can achieve high returns on equity without too much debt are generally of good quality. All else being equal, a higher ROE is better.

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 I think it may be worth checking this free report on 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.

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.

Advertisement