Boasting a return on equity of 16%, is Lapidoth Capital Ltd (TLV:LAPD) a superior stock?
One of the best investments we can make is in our own knowledge and skills. With that in mind, this article will explain how we can use return on equity (ROE) to better understand a business. Learning by doing, we will look at ROE to better understand Lapidoth Capital Ltd (TLV:LAPD).
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for Lapidoth Capital
How to calculate return on equity?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Lapidoth Capital’s ROE is:
16% = ₪382m ÷ ₪2.4b (Based on the last twelve months to December 2021).
“Yield” refers to a company’s earnings over the past year. This means that for every ₪1 of equity, the company generated 0.16₪ of profit.
Does Lapidoth Capital have a good return on equity?
By comparing a company’s ROE with the average for its industry, we can get a quick measure of its quality. It is important to note that this measure is far from perfect, as companies differ significantly within the same industry classification. Fortunately, Lapidoth Capital has an above-average ROE (6.1%) for the energy services industry.
It’s a good sign. However, keep in mind that a high ROE does not necessarily indicate efficient profit generation. In addition to changes in net income, a high ROE can also be the result of high debt to equity, which indicates risk. Our risk dashboard should contain the 4 risks we have identified for Lapidoth Capital.
Why You Should Consider Debt When Looking at ROE
Companies generally need to invest money to increase their profits. This money 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 use of debt will improve returns, but will not change equity. In this way, the use of debt will increase ROE, even though the core economics of the business remains the same.
Combine Lapidoth Capital’s debt and its 16% return on equity
Lapidoth Capital uses a high amount of debt to increase returns. Its debt to equity ratio is 1.12. There’s no doubt that its ROE is decent, but the company’s sky-high debt isn’t too exciting to see. Debt increases risk and reduces options for the business in the future, so you generally want to see good returns using it.
Return on equity is a way to compare the business quality of different companies. In our books, the highest quality companies have a high return on equity, despite low leverage. If two companies have the same ROE, I would generally prefer the one with less debt.
But when a company is of high quality, the market often gives it a price that reflects that. Earnings growth rates, relative to expectations reflected in the share price, are particularly important to consider. You can see how the company has grown in the past by watching this FREE detailed graph past profits, revenue and cash flow.
But note: Lapidoth Capital may not be the best stock to buy. So take a look at this free list of interesting companies with high ROE and low debt.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.