One of the best investments we can make is in 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. We'll use ROE to examine Nexstar Media Group, Inc. (NASDAQ:NXST), 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
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 Nexstar Media Group is:
17% = US$380m ÷ US$2.3b (Based on the trailing twelve months to June 2024).
The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.17.
Does Nexstar Media Group 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. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. As you can see in the graphic below, Nexstar Media Group has a higher ROE than the average (13%) in the Media industry.
NasdaqGS:NXST Return on Equity August 13th 2024
That's clearly a positive. 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. Our risks dashboardshould have the 2 risks we have identified for Nexstar Media Group.
Why You Should Consider Debt When Looking At ROE
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 required for growth will boost returns, but will not impact the shareholders' equity. That will make the ROE look better than if no debt was used.
Nexstar Media Group's Debt And Its 17% ROE
Nexstar Media Group clearly uses a high amount of debt to boost returns, as it has a debt to equity ratio of 2.97. There's no doubt its ROE is decent, but the very high debt the company carries is not too exciting to see. 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. In our books, the highest quality companies have high return on equity, despite low debt. 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. 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.
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.
私たちができる最高の投資の1つは、自分自身の知識とスキルセットに投資することです。その観点を踏まえて、この記事ではReturn On Equity (ROE)を使用してビジネスをよりよく理解する方法を説明します。 Nexstar Media Group, Inc. (NASDAQ:NXST)を例として、ROEを調べるために作業例で説明します。
企業のROEを評価する最も簡単な方法は、業種の平均と比較することです。重要なことは、企業は同じ業種分類内でも大きく異なるため、これは決して完璧な測定ではないということです。以下のグラフに示すように、Nexstar Media GroupのROEはメディア業界の平均(13%)よりも高いです。
NasdaqGS:NXSt Return on Equity August 13th 2024
それは明らかにポジティブです。ただし、高いROEが常に高い収益性を示すわけではありません。特に、企業が借入資本を高水準で使用し、ローンがROEを増加させることがあるが、高いレバレッジは企業をリスクにさらす場合があるためです。リスクダッシュボードには、Nexstar Media Groupで特定した2つのリスクがあります。
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オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。