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). We'll use ROE to examine Grey Rock Energy Management, LLC (NYSE:GRNT), by way of a worked example.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Grey Rock Energy Management
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Grey Rock Energy Management is:
37% = US$169m ÷ US$451m (Based on the trailing twelve months to September 2022).
The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.37.
Does Grey Rock Energy Management 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. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. If you look at the image below, you can see Grey Rock Energy Management has a similar ROE to the average in the Oil and Gas industry classification (33%).
That isn't amazing, but it is respectable. Even if the ROE is respectable when compared to the industry, its worth checking if the firm's ROE is being aided by high debt levels. If true, then it is more an indication of risk than the potential. You can see the 3 risks we have identified for Grey Rock Energy Management by visiting our risks dashboard for free on our platform here.
How Does Debt Impact ROE?
Virtually all companies need money to invest in the business, to grow profits. That cash can come from retained earnings, issuing new shares (equity), 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.
Grey Rock Energy Management's Debt And Its 37% ROE
One positive for shareholders is that Grey Rock Energy Management does not have any net debt! Its high ROE already points to a high quality business, but the lack of debt is a cherry on top. At the end of the day, when a company has zero debt, it is in a better position to take future growth opportunities.
Summary
Return on equity is one way we can compare its business quality of different companies. Companies that can achieve high returns on equity without too much debt are generally of good quality. 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 when a business is high quality, the market often bids it up to a price that reflects this. It is important to consider other factors, such as future profit growth -- and how much investment is required going forward. Check the past profit growth by Grey Rock Energy Management by looking at this visualization of past earnings, revenue and cash flow.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
多くの投資家たちはまだ株を分析する際に有用かもしれない様々な指標を勉強している。この文章は株式収益率(ROE)を知りたい人のために用意されている。実際の例として,純資産収益率を用いてGrey Rock Energy Management,LLC(ニューヨーク証券取引所コード:GRNT)を検討する
会社の純資産収益率を評価する最も簡単な方法は,所在業界の平均と比較することであるといえる.しかし、この方法は大まかな検査としてだけであり、同じ業界分類では、会社は確かに大きく異なるからである。図を見ると、Grey Rock Energy Managementの純資産収益率(ROE)は、石油と天然ガス産業分類の平均水準(33%)と似ていることが分かる
しかし、1つの業務が高品質である場合、市場はそれを反映した価格に上昇させることが多い。未来の利益増加や、未来にどれだけの投資が必要かなど、他の要素を考慮することが重要だ。過去の収益、収入、キャッシュフローの可視化を見ることで、Grey Rock Energy Managementの過去の利益増加状況を検査する