U.S. markets close in 6 hours 20 minutes
  • S&P 500

    3,787.80
    +19.33 (+0.51%)
     
  • Dow 30

    31,132.36
    +208.22 (+0.67%)
     
  • Nasdaq

    12,744.68
    +21.20 (+0.17%)
     
  • Russell 2000

    2,146.92
    -60.87 (-2.76%)
     
  • Crude Oil

    65.67
    +1.84 (+2.88%)
     
  • Gold

    1,700.20
    -0.50 (-0.03%)
     
  • Silver

    25.38
    -0.08 (-0.32%)
     
  • EUR/USD

    1.1925
    -0.0054 (-0.45%)
     
  • 10-Yr Bond

    1.5850
    +0.0350 (+2.26%)
     
  • GBP/USD

    1.3837
    -0.0057 (-0.41%)
     
  • USD/JPY

    108.3280
    +0.3520 (+0.33%)
     
  • BTC-USD

    48,425.45
    -967.96 (-1.96%)
     
  • CMC Crypto 200

    968.32
    +25.15 (+2.67%)
     
  • FTSE 100

    6,700.49
    +49.61 (+0.75%)
     
  • Nikkei 225

    28,864.32
    -65.78 (-0.23%)
     

Is Ventas, Inc.'s (NYSE:VTR) ROE Of 3.2% Concerning?

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
Simply Wall St
·4 min read
  • Oops!
    Something went wrong.
    Please try again later.
  • 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. We'll use ROE to examine Ventas, Inc. (NYSE:VTR), by way of a worked example.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Ventas

How Is ROE Calculated?

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 Ventas is:

3.2% = US$342m ÷ US$11b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.03.

Does Ventas Have A Good Return On Equity?

One simple way to determine if a company has a good return on equity is to compare it to the average for 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 shown in the graphic below, Ventas has a lower ROE than the average (5.4%) in the REITs industry classification.

roe
roe

Unfortunately, that's sub-optimal. Although, we think that a lower ROE could still mean that a company has the opportunity to better its returns with the use of leverage, provided its existing debt levels are low. A high debt company having a low ROE is a different story altogether and a risky investment in our books. Our risks dashboard should have the 5 risks we have identified for Ventas.

How Does Debt Impact ROE?

Companies usually need to invest money to grow their profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. In the first and second cases, the ROE will reflect this use of cash for investment in the business. In the latter case, the debt required for growth will boost returns, but will not impact the shareholders' equity. That will make the ROE look better than if no debt was used.

Ventas' Debt And Its 3.2% ROE

Ventas clearly uses a high amount of debt to boost returns, as it has a debt to equity ratio of 1.14. Its ROE is quite low, even with the use of significant debt; that's not a good result, in our opinion. Debt increases risk and reduces options for the company in the future, so you generally want to see some good returns from using it.

Conclusion

Return on equity is useful for comparing the quality of different businesses. In our books, the highest quality companies have high return on equity, despite low debt. 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.

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 check this FREE visualization of 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.

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.