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From: madrid (Rep: 6)Date: 01/17/2020 07:00
Forum: Penny Stocks - Msg #4287Thread #674117377 (Rec: 0)
Indutrade. Analysis
OM:INDT
Should You Be Excited About Indutrade AB (publ)’s (STO:INDT) 21% Return On Equity?
Simply Wall St January 17, 2020
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). To keep the lesson grounded in practicality, we’ll use ROE to better understand Indutrade AB (publ) (STO:INDT).

Indutrade has a ROE of 21%, based on the last twelve months. That means that for every SEK1 worth of shareholders’ equity, it generated SEK0.21 in profit.

Check out our latest analysis for Indutrade

How Do You Calculate Return On Equity?
The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

Or for Indutrade:

21% = kr1.5b ÷ kr6.9b (Based on the trailing twelve months to September 2019.)

Most know that net profit is the total earnings after all expenses, but the concept of shareholders’ equity is a little more complicated. 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?
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 profit over the last twelve months. That means that the higher the ROE, the more profitable the company is. So, all else being equal, a high ROE is better than a low one. That means ROE can be used to compare two businesses.

Does Indutrade Have A Good ROE?
By comparing a company’s ROE with its industry average, we can get a quick measure of how good it is. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. As is clear from the image below, Indutrade has a better ROE than the average (17%) in the Trade Distributors industry.

OM:INDT Past Revenue and Net Income, January 17th 2020
OM:INDT Past Revenue and Net Income, January 17th 2020
That is a good sign. We think a high ROE, alone, is usually enough to justify further research into a company. One data point to check is if insiders have bought shares recently.

How Does Debt Impact Return On Equity?
Most companies need money — from somewhere — to grow their profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. In the first two cases, the ROE will capture this use of capital to grow. 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.

Indutrade’s Debt And Its 21% ROE
While Indutrade does have some debt, with debt to equity of just 0.95, we wouldn’t say debt is excessive. When I see a high ROE, fuelled by only modest debt, I suspect the business is high quality. Conservative use of debt to boost returns is usually a good move for shareholders, though it does leave the company more exposed to interest rate rises.

The Bottom Line On ROE
Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. In my book the highest quality companies have high return on equity, despite low debt. All else being equal, a higher ROE is better.

https://simplywall.st/stocks/se/capital-goods/sto-indt/indutrade-shares/news/should-you-be-excited-about-indutrade-ab-publs-stoindt-21-return-on-equity/

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