Should we be pleased with the ROE of Diös Fastigheter AB (publ) (STO: DIOS) of 18%?


Many investors are still educating themselves about the various metrics that can be useful when analyzing a stock. This article is for those who want to learn more about return on equity (ROE). To keep the lesson practical, we will use the ROE to better understand Diös Fastigheter AB (publ) (STO: DIOS).

Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.

Check out our latest review for Diös Fastigheter

How to calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, Diös Fastigheter’s ROE is:

18% = kr1.8b ÷ kr10b (based on the last twelve months up to September 2021).

The “return” is the annual profit. This therefore means that for each SEK1 of the investments of its shareholder, the company generates a profit of SEK0.18.

Does Diös Fastigheter have a good return on equity?

By comparing a company’s ROE with its industry average, we can get a quick measure of its quality. However, this method is only useful as a rough check, as companies differ a lot within the same industry classification. Fortunately, Diös Fastigheter has an above-average ROE (14%) for the real estate industry.

OM: DIOS Return on Equity November 20, 2021

This is clearly a positive point. That said, high ROE doesn’t always indicate high profitability. Besides changes in net income, high ROE can also be the result of high leverage to equity, which indicates risk. To know the 4 risks that we have identified for Diös Fastigheter, visit our risk dashboard free of charge.

What is the impact of debt on return on equity?

Almost all businesses need money to invest in the business, to increase their profits. This liquidity can come from the issuance of shares, retained earnings or debt. In the first and second cases, the ROE will reflect this use of cash for investing in the business. In the latter case, the debt used for growth will improve returns, but will not affect total equity. In this way, the use of debt will increase the ROE, even if the basic economy of the business remains the same.

Diös Fastigheter’s debt and its 18% ROE

Diös Fastigheter clearly uses a high amount of debt to increase returns, as he has a debt to equity ratio of 1.45. While his ROE is quite respectable, the amount of debt the company currently carries is not ideal. Debt comes with additional risk, so it’s only really worth it when a business is making decent returns from it.

Summary

Return on equity is a useful indicator of a company’s ability to generate profits and return them to shareholders. A business that can earn a high return on equity without going into debt can be considered a high quality business. If two companies have roughly the same level of debt to equity and one has a higher ROE, I would generally prefer the one with a higher ROE.

But ROE is only one piece of a bigger puzzle, as high-quality companies often trade at high earnings multiples. Especially important to consider are the growth rates of earnings, relative to expectations reflected in the share price. So I think it’s worth checking this out free analyst forecast report for the company.

If you would rather consult with another company – one with potentially superior finances – then don’t miss this free list of interesting companies, which have a HIGH return on equity and low leverage.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St does not have any position in the mentioned stocks.

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