Based On Its ROE, Is Green Landscaping Group AB (publ) (STO:GREEN) A High Quality Stock?
While some investors are already familiar with financial metrics (hat tip), this article is aimed at those who want to learn more about Return On Equity (ROE) and why it matters. We will use ROE to study Green Landscaping Group AB (publ) (STO: GREEN) using an example.
Return on Equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. In other words, it shows the company’s success in converting shareholder investments into profits.
Check out our latest analysis for the Green Landscaping Group
How to calculate the return on equity
The return on equity can be calculated using the following formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
Based on the formula above, the ROE for the Green Landscaping Group is:
4.8% = 20 million kr ÷ 419 million kr (based on the last twelve months until September 2020).
The “rate of return” is the income that the company has earned over the past year. This means that for every SEK1 of its shareholders’ investments, the company makes a profit of SEK 0.05.
Does the Green Landscaping Group have a good ROE?
Perhaps the easiest way to evaluate a company’s ROE is to compare it to the average for its industry. The important thing is that this is far from a perfect measure, as companies differ significantly within the same industry classification. As shown in the graph below, the Green Landscaping Group has a lower ROE than the average (9.6%) in the commercial service industry classification.
OM: GREEN return on equity January 22, 2021
That is certainly not ideal. However, we believe that a lower ROE could still mean that a company has the ability to leverage its returns, assuming existing debt is low. When a company has a low ROE but high debt, we are cautious as the risk involved is too high. You can see the 3 risks we have identified for Green Landscaping Group by visiting our free risk dashboard on our platform here.
Why You Should Consider Debt When Looking At ROE
Virtually all businesses need money to invest in the business and make a profit. This money can come from the issue of stocks, retained earnings, or debt. In the first two cases, the ROE will capture this capital investment for growth. In the latter case, the debt required for growth will increase returns, but not affect equity. In this way, using debt will increase ROE while the core economics of the business remains the same.
Green Landscaping Group’s debt and its 4.8% ROE
It is worth noting that the Green Landscaping Group is heavily involved in debt and results in a leverage ratio of 1.45. The ROE is quite low despite using significant debt. In our opinion, this is not a good result. Investors should carefully consider how a company could do if it couldn’t borrow 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 good quality company. In general, if two companies have the same ROE, I’d prefer the one with less debt.
While ROE is a useful indicator of business quality, there are a number of factors you need to consider in order to determine the right price to buy a stock. It’s important to consider other factors, such as future earnings growth – and how much investment will be required in the future. I think this might be worth checking out free Report on analyst forecast for the company.
If you prefer to visit another company – one with potentially superior financial stats – this is not to be missed free List of interesting companies with high return on equity and low debt.
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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