One of the best investments we can make is investing in our own knowledge and skills. In this article, we will explore how Return on Equity (ROE) can be used to better understand business operations. By learning through action, we will examine ROE to gain a deeper understanding of Gen Digital Inc. (NASDAQ: GEN).
Return on Equity (ROE) is a metric that measures how effectively a company is growing its value and managing investors’ money. In other words, it is used to assess a company’s profitability in relation to its equity. How do we calculate ROE?
ROE can be calculated using the formula:
Return on Equity = Net Profit (from operating activities) ÷ Shareholders’ Equity.
Based on the above formula, the ROE for Gen Digital is 59%, which means the company earned $1.4 billion in relation to $2.4 billion in shareholder equity over the last twelve months ending in September 2023. This means that for every $1 of equity, the company was able to generate $0.59 in profit.
Does Gen Digital have a good ROE? The easiest way to evaluate a company’s ROE is by comparing it to the average ROE in its industry. However, it is important to note that this method serves only as a general check, as companies can vary within the same industry classification.
As shown in the chart below, Gen Digital has a higher ROE (9.7%) compared to the average value in the software industry. This is a positive indicator for the company.
However, it is important to remember that high ROE does not always indicate a stronger financial position. A higher proportion of debt in a company’s capital structure can also result in high ROE, where high levels of debt can pose significant risk.
Gen Digital utilizes a significant amount of debt to improve its returns, as evidenced by its high debt-to-equity ratio of 3.94. While the company has an impressive ROE, it has likely achieved this through substantial debt usage.
Return on Equity is a useful tool for comparing the quality of different companies. In our analysis, high-quality companies tend to have high ROE despite low levels of debt. If two companies have the same ROE, we usually prefer the one with lower debt. However, ROE is just one piece of a larger puzzle as high-quality companies often trade at higher profit multiples. It is also important to consider other factors such as future earnings growth and required investments.
Source: Gen Digital
High Return on Equity Sets Gen Digital Apart in the Software Industry
The source of the article is from the blog procarsrl.com.ar