Advertisement
U.S. markets closed
  • S&P Futures

    5,204.75
    -10.00 (-0.19%)
     
  • Dow Futures

    39,187.00
    -36.00 (-0.09%)
     
  • Nasdaq Futures

    18,167.50
    -64.00 (-0.35%)
     
  • Russell 2000 Futures

    2,046.20
    -3.60 (-0.18%)
     
  • Crude Oil

    82.56
    -0.16 (-0.19%)
     
  • Gold

    2,163.60
    -0.70 (-0.03%)
     
  • Silver

    25.27
    +0.01 (+0.04%)
     
  • EUR/USD

    1.0873
    -0.0004 (-0.03%)
     
  • 10-Yr Bond

    4.3400
    +0.0360 (+0.84%)
     
  • Vix

    14.33
    -0.08 (-0.56%)
     
  • GBP/USD

    1.2721
    -0.0007 (-0.06%)
     
  • USD/JPY

    149.2790
    +0.1810 (+0.12%)
     
  • Bitcoin USD

    65,851.95
    -1,693.48 (-2.51%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,722.55
    -4.87 (-0.06%)
     
  • Nikkei 225

    39,439.75
    -300.69 (-0.76%)
     

Should You Be Impressed By IPG Photonics Corporation’s (NASDAQ:IPGP) ROE?

Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!

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. To keep the lesson grounded in practicality, we’ll use ROE to better understand IPG Photonics Corporation (NASDAQ:IPGP).

Over the last twelve months IPG Photonics has recorded a ROE of 18%. One way to conceptualize this, is that for each $1 of shareholders’ equity it has, the company made $0.18 in profit.

See our latest analysis for IPG Photonics

How Do You Calculate ROE?

The formula for ROE is:

Return on Equity = Net Profit ÷ Shareholders’ Equity

Or for IPG Photonics:

18% = 404.027 ÷ US$2.2b (Based on the trailing twelve months to December 2018.)

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 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 profit over the last twelve months. That means that the higher the ROE, the more profitable the company is. So, as a general rule, a high ROE is a good thing. That means it can be interesting to compare the ROE of different companies.

Does IPG Photonics Have A Good ROE?

Arguably the easiest way to assess company’s ROE is to compare it with the average in its industry. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. Pleasingly, IPG Photonics has a superior ROE than the average (11%) company in the Electronic industry.

NASDAQGS:IPGP Last Perf February 18th 19
NASDAQGS:IPGP Last Perf February 18th 19

That’s clearly a positive. 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.

How Does Debt Impact ROE?

Most companies need money — from somewhere — to grow their profits. That cash can come from issuing shares, retained earnings, or debt. 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.

Combining IPG Photonics’s Debt And Its 18% Return On Equity

Although IPG Photonics does use a little debt, its debt to equity ratio of just 0.021 is very low. The combination of modest debt and a very respectable ROE suggests this is a business worth watching. Judicious use of debt to improve returns can certainly be a good thing, although it does elevate risk slightly and reduce future optionality.

But It’s Just One Metric

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.

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 you might want to take a peek at this data-rich interactive graph of forecasts for the company.

But note: IPG Photonics 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.

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.

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. On rare occasion, data errors may occur. Thank you for reading.

Advertisement