U.S. markets close in 35 minutes
  • S&P 500

    3,232.15
    -4.77 (-0.15%)
     
  • Dow 30

    26,702.45
    -60.68 (-0.23%)
     
  • Nasdaq

    10,618.54
    -14.45 (-0.14%)
     
  • Russell 2000

    1,453.15
    +1.69 (+0.12%)
     
  • Crude Oil

    40.17
    +0.24 (+0.60%)
     
  • Gold

    1,869.20
    +0.80 (+0.04%)
     
  • Silver

    23.16
    +0.05 (+0.22%)
     
  • EUR/USD

    1.1669
    +0.0007 (+0.06%)
     
  • 10-Yr Bond

    0.6660
    -0.0100 (-1.48%)
     
  • GBP/USD

    1.2740
    +0.0014 (+0.11%)
     
  • USD/JPY

    105.4190
    +0.0870 (+0.08%)
     
  • BTC-USD

    10,633.42
    +383.95 (+3.75%)
     
  • CMC Crypto 200

    216.67
    +7.73 (+3.70%)
     
  • FTSE 100

    5,822.78
    -76.48 (-1.30%)
     
  • Nikkei 225

    23,087.82
    -258.67 (-1.11%)
     

How Did NV5 Global, Inc.'s (NASDAQ:NVEE) 8.0% ROE Fare Against The Industry?

Simply Wall St

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. By way of learning-by-doing, we'll look at ROE to gain a better understanding of NV5 Global, Inc. (NASDAQ:NVEE).

Our data shows NV5 Global has a return on equity of 8.0% for the last year. One way to conceptualize this, is that for each $1 of shareholders' equity it has, the company made $0.08 in profit.

Check out our latest analysis for NV5 Global

How Do I Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit ÷ Shareholders' Equity

Or for NV5 Global:

8.0% = US$28m ÷ US$348m (Based on the trailing twelve months to September 2019.)

It's easy to understand the 'net profit' part of that equation, but 'shareholders' equity' requires further explanation. It is the capital paid in by shareholders, plus any retained earnings. You can calculate shareholders' equity by subtracting the company's total liabilities from its total assets.

What Does ROE Signify?

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 profit over the last twelve months. That means that the higher the ROE, the more profitable the company is. So, all else equal, investors should like a high ROE. Clearly, then, one can use ROE to compare different companies.

Does NV5 Global Have A Good ROE?

One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. You can see in the graphic below that NV5 Global has an ROE that is fairly close to the average for the Construction industry (9.3%).

NasdaqCM:NVEE Past Revenue and Net Income, December 11th 2019
NasdaqCM:NVEE Past Revenue and Net Income, December 11th 2019

That's neither particularly good, nor bad. ROE can give us a view about company quality, but many investors also look to other factors, such as whether there are insiders buying shares. I will like NV5 Global better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

How Does Debt Impact ROE?

Virtually all companies need money to invest in the business, to grow profits. That cash can come from retained earnings, issuing new shares (equity), or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the use of debt will improve the returns, but will not change the equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.

NV5 Global's Debt And Its 8.0% ROE

Although NV5 Global does use debt, its debt to equity ratio of 0.16 is still low. Although the ROE isn't overly impressive, the debt load is modest, suggesting the business has potential. Judicious use of debt to improve returns can certainly be a good thing, although it does elevate risk slightly and reduce future optionality.

In Summary

Return on equity is useful for comparing the quality of different businesses. Companies that can achieve high returns on equity without too much debt are generally of good quality. 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 ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. 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: NV5 Global 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.

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.