U.S. markets close in 5 hours 52 minutes
  • S&P 500

    3,742.78
    -76.05 (-1.99%)
     
  • Dow 30

    30,480.05
    -549.26 (-1.77%)
     
  • Nasdaq

    10,851.45
    -326.44 (-2.92%)
     
  • Russell 2000

    1,685.17
    -34.20 (-1.99%)
     
  • Crude Oil

    107.53
    -2.25 (-2.05%)
     
  • Gold

    1,818.80
    +1.30 (+0.07%)
     
  • Silver

    20.42
    -0.31 (-1.51%)
     
  • EUR/USD

    1.0428
    -0.0016 (-0.16%)
     
  • 10-Yr Bond

    3.0220
    -0.0710 (-2.30%)
     
  • GBP/USD

    1.2183
    +0.0061 (+0.50%)
     
  • USD/JPY

    135.8540
    -0.6910 (-0.51%)
     
  • BTC-USD

    18,896.54
    -1,208.06 (-6.01%)
     
  • CMC Crypto 200

    404.02
    -27.45 (-6.36%)
     
  • FTSE 100

    7,132.84
    -179.48 (-2.45%)
     
  • Nikkei 225

    26,393.04
    -411.56 (-1.54%)
     

Is Owens & Minor, Inc. (NYSE:OMI) A High Quality Stock To Own?

  • Oops!
    Something went wrong.
    Please try again later.
·3 min read
In this article:
  • 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 Owens & Minor, Inc. (NYSE:OMI).

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Owens & Minor

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Owens & Minor is:

20% = US$191m ÷ US$948m (Based on the trailing twelve months to March 2022).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.20 in profit.

Does Owens & Minor 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. As is clear from the image below, Owens & Minor has a better ROE than the average (16%) in the Healthcare industry.

roe
roe

That is a good sign. Bear in mind, a high ROE doesn't always mean superior financial performance. Especially when a firm uses high levels of debt to finance its debt which may boost its ROE but the high leverage puts the company at risk. Our risks dashboardshould have the 3 risks we have identified for Owens & Minor.

The Importance Of Debt To Return On Equity

Virtually all companies need money to invest in the business, to grow 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 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.

Combining Owens & Minor's Debt And Its 20% Return On Equity

It's worth noting the high use of debt by Owens & Minor, leading to its debt to equity ratio of 2.78. There's no doubt its ROE is decent, but the very high debt the company carries is not too exciting to see. 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 one way we can compare its business quality of different companies. 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.

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. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So I think it may be worth checking this free report on analyst forecasts for the company.

If you would prefer check out another company -- one with potentially superior financials -- then do not miss this free list of interesting companies, that have HIGH return on equity and low debt.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.