Should You Be Concerned About Beacon Roofing Supply, Inc.’s (NASDAQ:BECN) ROE?
While some investors are already well-versed in financial statistics (hat tip), this article is for those who want to learn more about Return On Equity (ROE) and why it matters. To keep the lesson practical, we’ll use ROE to call Beacon Roofing Supply, Inc. easier to understand (NASDAQ:BECN).
Return on Equity or ROE is an important factor a shareholder should consider as it tells them how effectively their capital is being reinvested. Basically, ROE shows the profit that each dollar generates in relation to its shareholder investments.
How to calculate the return on equity?
The return on equity formula is:
Return on equity = net profit (from continuing operations) ÷ equity
So, based on the above formula, the ROE for Beacon Roofing Supply is:
5.2% = US$101 million ÷ US$2.0 billion (based on 12 months remaining to March 2021).
The “return” refers to a company’s profit over the past year. That means that for every $1 in equity, the company generated $0.05 in profit.
Does Beacon Roofing Supply have a good return on equity?
By comparing a company’s ROE to the industry average, we can quickly see how good it is. However, this method is only useful as a rough check, as companies vary quite a bit within the same industry classification. If you look at the image below, you will see that Beacon Roofing Supply has a lower ROE than the average (12%) in the Trade Distributors industry ranking.
That’s not what we like to see. Although we think a lower ROE could still mean that a company has the opportunity to improve its returns using leverage, provided its existing debt levels are low. A highly indebted company with a low ROE is a different story and a risky investment in our books. To know the 2 risks we identified for Beacon Roofing Supply, visit our: risk dashboard free.
How Does Debt Affect ROE?
Most companies need money — from somewhere — to grow their profits. That money can come from the issuance of stock, retained earnings or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, using debt will improve returns, but will not change equity. So using debt can improve ROE, albeit along with additional risk in the event of stormy weather, figuratively speaking.
Combining Beacon Roofing Supply’s Debt with 5.2% Return on Equity
Beacon Roofing Supply uses a high amount of debt to increase returns. It has a debt-to-equity ratio of 1.08. With a fairly low ROE and significant use of debt, it’s hard to get excited about this business at the moment. Investors should think carefully about how a company would perform if it couldn’t borrow so easily, as credit markets change over time.
Return on equity is a useful indicator of a company’s ability to generate profits and return them to shareholders. A company that can achieve a high return on equity without debt can be considered a high-quality business. If two companies have about the same level of debt as equity, and one has a higher ROE, I would generally prefer the one with a higher ROE.
But if a company is of high quality, the market often offers it at a price that reflects this. The rate at which earnings are likely to grow should also be taken into account relative to earnings growth expectations reflected in the current price. So you might want to check this out for FREE visualization of analyst forecasts for the company the.
If you’d rather visit another company – a company with potentially superior financial data – don’t miss this one free list of interesting companies with a HIGH return on equity and a low debt.
This article from Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or your financial situation. We strive to provide you with long-term focused analysis powered by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no position in said stocks.
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