【how many gallons is 192 oz】A Closer Look At Alicon Castalloy Limited’s (NSE:ALICON) Impressive ROE
One of the best investments we can make is how many gallons is 192 ozin our own knowledge and skill set. With that in mind, this article will work through how we can use Return On Equity (ROE) to better understand a business. By way of learning-by-doing, we’ll look at ROE to gain a better understanding of Alicon Castalloy Limited (
NSE:ALICON
).
Over the last twelve months
Alicon Castalloy has recorded a ROE of 18%
. Another way to think of that is that for every ₹1 worth of equity in the company, it was able to earn ₹0.18.
View our latest analysis for Alicon Castalloy
How Do I Calculate ROE?
The
formula for return on equity
is:
Return on Equity = Net Profit ÷ Shareholders’ Equity
Or for Alicon Castalloy:
18% = 498.77 ÷ ₹2.8b (Based on the trailing twelve months to December 2018.)
Most readers would understand what net profit is, but it’s worth explaining the concept of shareholders’ equity. It is the capital paid in by shareholders, plus any retained earnings. Shareholders’ equity can be calculated by subtracting the total liabilities of the company from the total assets of the company.
What Does ROE Mean?
Return on Equity measures a company’s profitability against the profit it has kept for the business (plus any capital injections). The ‘return’ is the yearly profit. That means that the higher the ROE, the more profitable the company is. So, all else equal,
investors should like a high ROE
. Clearly, then, one can use ROE to compare different companies.
Does Alicon Castalloy Have A Good Return On Equity?
One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. As is clear from the image below, Alicon Castalloy has a better ROE than the average (14%) in the Auto Components industry.
NSEI:ALICON Past Revenue and Net Income, March 1st 2019
That’s clearly a positive. I usually take a closer look when a company has a better ROE than industry peers. For example
you might check
if insiders are buying shares.
How Does Debt Impact Return On Equity?
Virtually all companies need money to invest in the business, to grow profits. That cash can come from issuing shares, retained earnings, or debt. 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. That will make the ROE look better than if no debt was used.
Alicon Castalloy’s Debt And Its 18% ROE
It’s worth noting the significant use of debt by Alicon Castalloy, leading to its debt to equity ratio of 1.03. while its ROE is respectable, it is worth keeping in mind that there is usually a limit to how much debt a company can use. Debt increases risk and reduces options for the company in the future, so you generally want to see some good returns from using it.
Story continues
In Summary
Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. Companies that can achieve high returns on equity without too much debt are generally of good quality. All else being equal, a higher ROE is better.
Having said that, while ROE is a useful indicator of business quality, you’ll have to look at a whole range of factors to determine the right price to buy a stock. It is important to consider other factors, such as future profit growth — and how much investment is required going forward. So I think it may be worth checking this
free
report on analyst forecasts for the company
.
But note:
Alicon Castalloy may not be the best stock to buy
. So take a peek at this
free
list of interesting companies with 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
. 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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