U.S. markets closed
  • S&P Futures

    3,826.00
    -13.00 (-0.34%)
     
  • Dow Futures

    31,456.00
    -9.00 (-0.03%)
     
  • Nasdaq Futures

    12,528.25
    -135.50 (-1.07%)
     
  • Russell 2000 Futures

    2,187.80
    -1.90 (-0.09%)
     
  • Crude Oil

    67.35
    +1.26 (+1.91%)
     
  • Gold

    1,703.10
    +4.60 (+0.27%)
     
  • Silver

    25.66
    +0.37 (+1.48%)
     
  • EUR/USD

    1.1908
    -0.0017 (-0.14%)
     
  • 10-Yr Bond

    1.5540
    +0.0040 (+0.26%)
     
  • Vix

    24.66
    -3.91 (-13.69%)
     
  • GBP/USD

    1.3820
    -0.0008 (-0.06%)
     
  • USD/JPY

    108.3870
    +0.0050 (+0.00%)
     
  • BTC-USD

    50,433.54
    +839.04 (+1.69%)
     
  • CMC Crypto 200

    1,020.88
    +77.70 (+8.24%)
     
  • FTSE 100

    6,630.52
    -20.36 (-0.31%)
     
  • Nikkei 225

    28,743.26
    -121.06 (-0.42%)
     

Is Omnicom Group Inc. (NYSE:OMC) A High Quality Stock To Own?

  • Oops!
    Something went wrong.
    Please try again later.
Simply Wall St
·3 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. To keep the lesson grounded in practicality, we'll use ROE to better understand Omnicom Group Inc. (NYSE:OMC).

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Omnicom Group

How To Calculate Return On Equity?

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 Omnicom Group is:

46% = US$1.4b ÷ US$3.1b (Based on the trailing twelve months to March 2020).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.46.

Does Omnicom Group Have A Good ROE?

Arguably the easiest way to assess company's ROE is to compare it with the average in its industry. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. As is clear from the image below, Omnicom Group has a better ROE than the average (13%) in the Media industry.

roe
roe

That is a good sign. Bear in mind, a high ROE doesn't always mean superior financial performance. Aside from changes in net income, a high ROE can also be the outcome of high debt relative to equity, which indicates risk.

Why You Should Consider Debt When Looking At ROE

Most companies need money -- from somewhere -- to grow their 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.

Omnicom Group's Debt And Its 46% ROE

It's worth noting the high use of debt by Omnicom Group, leading to its debt to equity ratio of 1.52. Its ROE is pretty impressive but, it would have probably been lower without the use of debt. Debt does bring extra risk, so it's only really worthwhile when a company generates some decent returns from it.

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 the same ROE, then I would generally prefer the one with less debt.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So you might want to check this FREE visualization of analyst forecasts for the company.

Of course Omnicom Group may not be the best stock to buy. So you may wish to see this free collection of other companies that have 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@simplywallst.com.