Is Kencana Agri Limited’s (SGX: BNE) 55% ROE Impressive?
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. We will use ROE to examine Kencana Agri Limited (SGX:BNE), as a concrete example.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
Check out our latest analysis for Kencana Agri
How is ROE calculated?
the return on equity formula East:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Kencana Agri is:
55% = $17 million ÷ $31 million (based on trailing 12 months to December 2021).
“Yield” is the income the business has earned over the past year. This means that for every SGD1 of equity, the company generated a profit of SGD 0.55.
Does Kencana Agri 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. The limitation of this approach is that some companies are very different from others, even within the same industrial classification. Fortunately, Kencana Agri has an above-average ROE (11%) for the food industry.
That’s what we like to see. That said, a high ROE does not always mean high profitability. Besides changes in net income, a high ROE can also be the result of high debt to equity, which indicates risk. You can see the 3 risks we have identified for Kencana Agri by visiting our risk dashboard for free on our platform here.
What is the impact of debt on ROE?
Most businesses need money – from somewhere – to increase their profits. This money can come from issuing shares, retained earnings or debt. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the use of debt will improve returns, but will not change equity. Thus, the use of debt can improve ROE, but with an additional risk in the event of a storm, metaphorically speaking.
Kencana Agri’s debt and its 55% ROE
It appears that Kencana Agri is using debt heavily to improve its returns, as it has an alarming debt-to-equity ratio of 7.51. Its ROE is certainly quite good, but it seems to be boosted by the company’s extensive use of debt.
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 ROE is only one piece of a larger puzzle, as high-quality companies often trade on high earnings multiples. The rate at which earnings are likely to grow, relative to earnings growth expectations reflected in the current price, should also be considered. Check Kencana Agri’s past profit growth with this visualization of past profit, revenue, and cash flow.
Sure Kencana Agri may not be the best stock to buy. So you might want to see this free collection of other companies that have high ROE and low debt.
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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.