【allis chalmers c wide front】Why Vita Life Sciences Limited (ASX:VLS) Looks Like A Quality Company
One of the best investments we can make is allis chalmers c wide frontin 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. To keep the lesson grounded in practicality, we’ll use ROE to better understand Vita Life Sciences Limited ( ASX:VLS ). Vita Life Sciences has a ROE of 15% , based on the last twelve months. Another way to think of that is that for every A$1 worth of equity in the company, it was able to earn A$0.15. View our latest analysis for Vita Life Sciences How Do I Calculate Return On Equity? The formula for ROE is: Return on Equity = Net Profit ÷ Shareholders’ Equity Or for Vita Life Sciences: 15% = 3.844 ÷ AU$25m (Based on the trailing twelve months to June 2018.) Most readers would understand what net profit is, but it’s worth explaining the concept of shareholders’ equity. It is the capital paid in by shareholders, plus any retained earnings. The easiest way to calculate shareholders’ equity is to subtract the company’s total liabilities from the total assets. What Does Return On Equity Mean? ROE measures a company’s profitability against the profit it retains, and any outside investments. The ‘return’ is the profit over the last twelve months. That means that the higher the ROE, the more profitable the company is. So, all else equal, investors should like a high ROE . Clearly, then, one can use ROE to compare different companies. Does Vita Life Sciences 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. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. As is clear from the image below, Vita Life Sciences has a better ROE than the average (8.2%) in the Pharmaceuticals industry. ASX:VLS Last Perf January 1st 19 That’s what I like to see. In my book, a high ROE almost always warrants a closer look. For example, I often check if insiders have been buying shares . Why You Should Consider Debt When Looking At ROE Companies usually need to invest money to grow their 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. Vita Life Sciences’s Debt And Its 15% ROE While Vita Life Sciences does have a tiny amount of debt, with debt to equity of just 0.088, we think the use of debt is very modest. The fact that it achieved a fairly good ROE with only modest debt suggests the business might be worth putting on your watchlist. Conservative use of debt to boost returns is usually a good move for shareholders, though it does leave the company more exposed to interest rate rises. Story continues The Bottom Line On ROE Return on equity is useful for comparing the quality of different businesses. In my book the highest quality companies have high return on equity, despite low debt. If two companies have the same ROE, then I would generally prefer the one with less debt. But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. You can see how the company has grow in the past by looking at this FREE detailed graph of past earnings, revenue and cash flow . If you would prefer check out another company — one with potentially superior financials — then do not miss this free list of interesting companies, that have HIGH return on equity and low debt. To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements. The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at . View comments
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