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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 Betterware de México, S.A.P.I. de C.V. (NYSE:BWMX).
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Betterware de MéxicoP.I. de
How To Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Betterware de MéxicoP.I. de is:
75% = Mex$886m ÷ Mex$1.2b (Based on the trailing twelve months to September 2024).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.75 in profit.
Does Betterware de MéxicoP.I. de Have A Good ROE?
One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. Pleasingly, Betterware de MéxicoP.I. de has a superior ROE than the average (19%) in the Specialty Retail industry.
That's clearly a positive. However, bear in mind that a high ROE doesn’t necessarily indicate efficient profit generation. Especially when a firm uses high levels of debt to finance its debt which may boost its ROE but the high leverage puts the company at risk. Our risks dashboardshould have the 2 risks we have identified for Betterware de MéxicoP.I. de.
Why You Should Consider Debt When Looking At ROE
Most companies need money -- from somewhere -- to grow their profits. That cash can come from issuing shares, retained earnings, or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the use of debt will improve the returns, but will not change the equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.
Combining Betterware de MéxicoP.I. de's Debt And Its 75% Return On Equity
It seems that Betterware de MéxicoP.I. de uses a huge volume of debt to fund the business, since it has an extremely high debt to equity ratio of 4.17. Its ROE is clearly quite good, but it seems to be boosted by the significant use of debt by the company.