Bijou Brigitte modische Accessoires Aktiengesellschaft (FRA:BIJ) Has A ROE Of 9.2%

Simply Wall St

Wed, Jun 5, 2019, 11:11 PM

Many investors are still learning about the various metrics that can be useful when analysing a stock. This article is for those who would like to learn about Return On Equity (ROE). By way of learning-by-doing, we'll look at ROE to gain a better understanding of Bijou Brigitte modische Accessoires Aktiengesellschaft (FRA:BIJ).

Bijou Brigitte modische Accessoires has a ROE of 9.2%, based on the last twelve months. Another way to think of that is that for every €1 worth of equity in the company, it was able to earn €0.092.

See our latest analysis for Bijou Brigitte modische Accessoires

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit ÷ Shareholders' Equity

Or for Bijou Brigitte modische Accessoires:

9.2% = €22m ÷ €235m (Based on the trailing twelve months to December 2018.)

It's easy to understand the 'net profit' part of that equation, but 'shareholders' equity' requires further explanation. It is all earnings retained by the company, plus any capital paid in by shareholders. The easiest way to calculate shareholders' equity is to subtract the company's total liabilities from the total assets.

What Does Return On Equity Mean?

ROE measures a company's profitability against the profit it retains, and any outside investments. The 'return' is the amount earned after tax over the last twelve months. A higher profit will lead to a higher ROE. So, all else equal, investors should like a high ROE. That means ROE can be used to compare two businesses.

Does Bijou Brigitte modische Accessoires Have A Good Return On Equity?

Arguably the easiest way to assess company's ROE is to compare it with the average in its industry. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. You can see in the graphic below that Bijou Brigitte modische Accessoires has an ROE that is fairly close to the average for the Luxury industry (9.2%).

DB:BIJ Past Revenue and Net Income, June 6th 2019

That's neither particularly good, nor bad. ROE doesn't tell us if the share price is low, but it can inform us to the nature of the business. For those looking for a bargain, other factors may be more important. I will like Bijou Brigitte modische Accessoires better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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 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 won't affect the total equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.

Combining Bijou Brigitte modische Accessoires's Debt And Its 9.2% Return On Equity

One positive for shareholders is that Bijou Brigitte modische Accessoires does not have any net debt! Its respectable ROE suggests it is a business worth watching, but it's even better the company achieved this without leverage. At the end of the day, when a company has zero debt, it is in a better position to take future growth opportunities.

But It's Just One Metric

Return on equity is one way we can compare the business quality of different companies. A company that can achieve a high return on equity without debt could be considered a high quality business. 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.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.

Of course Bijou Brigitte modische Accessoires may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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