While some investors are already familiar with financial metrics (hat tip), this article is for those who want to learn more about return on equity (ROE) and why it is important. To keep the lesson grounded in practicality, we will use ROE to better understand TV Azteca, SAB de CV (BMV: AZTECACPO).
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for TV Azteca. of
How do you calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for TV Azteca. from is:
12% = 128 million Mexican dollars ÷ 1.0 billion Mexican dollars (based on the last twelve months to March 2021).
The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every MX dollar of shareholder capital it has, the company made a profit of MX $ 0.12.
Does TV Azteca. to have a good return on equity?
By comparing a company’s ROE to its industry average, we can get a quick measure of its quality. The limitation of this approach is that some companies are very different from others, even within the same industry classification. As can be seen from the image below, TV Azteca. de has a better ROE than the average (5.4%) in the media industry.
It’s a good sign. However, keep in mind that a high ROE does not necessarily indicate efficient profit generation. Especially when a business uses high levels of leverage to finance its debt, which can increase its ROE, but high leverage puts the business at risk. Know the 2 risks that we have identified for TV Azteca. to visit our risk dashboard for free.
How Does Debt Affect Return on Equity?
Most businesses need money – from somewhere – to grow their profits. The money to invest can come from the previous year’s profits (retained earnings), from the issuance of new shares, or from borrowing. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the debt used for growth will improve returns, but will not affect total equity. So, using debt can improve ROE, but with added risk in stormy weather, metaphorically speaking.
Combining Azteca TV. de’s debt and its 12% return on equity
We are thinking of TV Azteca. de uses a large amount of debt to maximize its returns because its debt-to-equity ratio is significantly higher at 12.06. Most investors would need a low stock price to be interested in a company with a low ROE and high leverage on equity.
Return on equity is useful for comparing the quality of different companies. A business that can earn a high return on equity without debt could be considered a high quality business. All other things being equal, a higher ROE is preferable.
That said, while ROE is a useful indicator of how good a business is, you’ll need to look at a variety of factors to determine the right price to buy a stock. Especially important to consider are the growth rates of earnings, relative to expectations reflected in the share price. So I think it might be worth checking this out free this detailed graphic past earnings, income and cash flow.
Of course Azteca TV. may not be the best stock to buy. Then you might want to see this free collects other companies that have high ROE and low debt.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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