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 Pilgrim's Pride Corporation (NASDAQ:PPC), by way of a worked example.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Pilgrim's Pride
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Pilgrim's Pride is:
1.1% = US$33m ÷ US$3.1b (Based on the trailing twelve months to September 2023).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.01 in profit.
Does Pilgrim's Pride Have A Good ROE?
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. As is clear from the image below, Pilgrim's Pride has a lower ROE than the average (12%) in the Food industry.
NasdaqGS:PPC Return on Equity December 20th 2023
Unfortunately, that's sub-optimal. That being said, a low ROE is not always a bad thing, especially if the company has low leverage as this still leaves room for improvement if the company were to take on more debt. A company with high debt levels and low ROE is a combination we like to avoid given the risk involved. You can see the 3 risks we have identified for Pilgrim's Pride by visiting our risks dashboard for free on our platform here.
How Does Debt Impact Return On Equity?
Companies usually need to invest money 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 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 Pilgrim's Pride's Debt And Its 1.1% Return On Equity
Pilgrim's Pride clearly uses a high amount of debt to boost returns, as it has a debt to equity ratio of 1.20. Its ROE is quite low, even with the use of significant debt; that's not a good result, in our opinion. 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 one way we can compare its business quality of different companies. A company that can achieve a high return on equity without debt could be considered a high quality business. 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.
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. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.
Of course Pilgrim's Pride may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.
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.
許多投資者仍在學習分析股票時可能有用的各種指標。本文適用於那些想了解股本回報率(ROE)的人。我們將使用ROE來舉一個行之有效的例子來研究Pilgrim's Pride Corporation(納斯達克股票代碼:PPC)。
不幸的是,這並不理想。話雖如此,較低的投資回報率並不總是一件壞事,尤其是在公司的槓桿率較低的情況下,因爲如果公司承擔更多債務,這仍有改善的餘地。考慮到所涉及的風險,我們希望避免將高債務水平和低投資回報率的公司結合起來。您可以通過訪問我們的 Pilgrim's Pride 來查看我們爲 Pilgrim's Pride 確定的三種 風險儀表板 在我們的平台上免費使用。