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 C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW).

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested.  In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Do You Calculate Return On Equity?

ROE 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 C.H. Robinson Worldwide is:

23% = US$325m ÷ US$1.4b (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax over the last twelve months.  Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.23 in profit.

Does C.H. Robinson Worldwide 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.  The limitation of this approach is that some companies are quite different from others, even within the same industry classification.   Pleasingly, C.H. Robinson Worldwide has a superior ROE than the average (10%) in the Logistics industry.

NasdaqGS:CHRW Return on Equity April 2nd 2024

That's what we like to see.     With that said, a high ROE doesn't always indicate high profitability.  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.   To know the 2 risks we have identified for C.H. Robinson Worldwide visit our risks dashboard for free.

The Importance Of Debt To Return On Equity

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 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.  Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.

Combining C.H. Robinson Worldwide's Debt And Its 23% Return On Equity

C.H. Robinson Worldwide clearly uses a high amount of debt to boost returns, as it has a debt to equity ratio of 1.11.   Its ROE is pretty impressive but, it would have probably been lower without the use of debt.   Debt does bring extra risk, so it's only really worthwhile when a company generates some decent returns from it.  

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.

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.   So you might want to take a peek at this data-rich interactive graph of forecasts for the company.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this  free list of interesting companies.

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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.