Is the ROE of 52% of Mordovia Energy Retail Company Public Joint-Stock Company (MCX: MRSB) above average?
One of the best investments we can make is in our own knowledge and skills. With that in mind, this article will explain how we can use return on equity (ROE) to better understand a business. We will use ROE to look at the public joint-stock company Mordovia Energy Retail Company (MCX: MRSB), as a concrete example.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simple terms, it is used to assess the profitability of a company in relation to its equity.
See our latest analysis for Mordovia Energy Retail Company
How to calculate return on equity?
the return on equity formula East:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of Mordovia Energy Retail Company is:
52% = ₽148m ÷ ₽287m (Based on past twelve months to September 2021).
The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every RUB1 of share capital it has, the company has made a profit of RUB 0.52.
Does Mordovia Energy Retail Company have a good return on equity?
By comparing a company’s ROE with the average for its industry, we can get a quick measure of its quality. However, this method is only useful as a rough check, as companies differ quite a bit within the same industry classification. Fortunately, Mordovia Energy Retail Company has an above average ROE (9.8%) for the electric utility industry.
It’s a good sign. Keep in mind that a high ROE does not always mean superior financial performance. Besides changes in net income, a high ROE can also be the result of high debt to equity, which indicates risk. You can see the 4 risks we have identified for Mordovia Energy Retail Company by visiting our risk dashboard for free on our platform here.
What is the impact of debt on ROE?
Virtually all businesses need money to invest in the business, to increase their profits. The money for the investment can come from the previous year’s earnings (retained earnings), from issuing new shares or from borrowing. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, debt used for growth will improve returns, but will not affect total equity. Thus, the use of debt can improve ROE, but with an additional risk in the event of a storm, metaphorically speaking.
Combination of Mordovia Energy Retail Company debt and its return on equity of 52%
Mordovia Energy Retail Company uses a high amount of debt to increase returns. Its debt to equity ratio is 1.99. There is no doubt that ROE is impressive, but it is worth bearing in mind that the measure could have been lower if the company had reduced its debt. Debt brings additional risk, so it’s only really worth it when a business is generating decent returns.
Return on equity is a useful indicator of a company’s ability to generate profits and return them to shareholders. A company that can earn a high return on equity without going into debt could be considered a high quality company. If two companies have roughly the same level of debt and one has a higher ROE, I generally prefer the one with a higher ROE.
That said, while ROE is a useful indicator of a company’s quality, you’ll need to consider a whole host of factors to determine the right price to buy a stock. The rate at which earnings are likely to grow, relative to earnings growth expectations reflected in the current price, should also be considered. You can see how the company has grown in the past by watching this FREE detailed graph past profits, revenue and cash flow.
But note: Mordovia Energy Retail Company may not be the best stock to buy. So take a look at this free list of interesting companies with high ROE and low debt.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.