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). By way of learning-by-doing, we'll look at ROE to gain a better understanding of Hilton Grand Vacations Inc. (NYSE:HGV).
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.
How To Calculate Return On Equity?
Return on equity 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 Hilton Grand Vacations is:
7.8% = US$162m ÷ US$2.1b (Based on the trailing twelve months to June 2024).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.08 in profit.
Does Hilton Grand Vacations 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 shown in the graphic below, Hilton Grand Vacations has a lower ROE than the average (17%) in the Hospitality industry classification.
That certainly isn't ideal. Although, we think that a lower ROE could still mean that a company has the opportunity to better its returns with the use of leverage, provided its existing debt levels are low. When a company has low ROE but high debt levels, we would be cautious as the risk involved is too high. Our risks dashboard should have the 3 risks we have identified for Hilton Grand Vacations.
Why You Should Consider Debt When Looking At ROE
Virtually all companies need money to invest in the business, to grow profits. That cash can come from issuing shares, retained earnings, or debt. In the first and second cases, the ROE will reflect this use of cash for investment in the business. In the latter case, the use of debt will improve the returns, but will not change the equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.
Hilton Grand Vacations' Debt And Its 7.8% ROE
It appears that Hilton Grand Vacations makes extensive use of debt to improve its returns, because it has an alarmingly high debt to equity ratio of 3.18. Most investors would need a low share price to be interested in a company with low ROE and high debt to equity.
Summary
Return on equity is useful for comparing the quality of different businesses. 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.
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, 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.
株式を分析する際に役立つ様々な指標を学ぶ投資家がまだ多数存在しています。この記事は、Return On Equity(ROE)について学びたい人たちのためのものです。実際にやりながら、ROEを見て、Hilton Grand Vacations Inc.(NYSE:HGV)をより理解しましょう。
企業のROEを評価する最も簡単な方法は、業種内の平均と比較することです。ただし、同じ業種分類内でも企業ごとにかなり異なるため、この方法はおおまかなチェックとしてしか役立ちません。下のグラフに示すように、Hilton Grand VacationsはHospitality業種分類の平均(17%)よりも低いROEを持っています。
それは確かに理想的ではありません。ただし、低いROEは、既存の債務レベルが低い場合にのみ、杠杆を利用して収益を向上させる機会を持つことができる可能性があると考えています。企業が低いROEを持ちながら高い債務レベルを抱えている場合、リスクが高すぎるため慎重である必要があります。Hilton Grand Vacationsで特定した3つのリスクがあるリスクダッシュボードを確認できます。
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。
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。