Thessaloniki Water Supply & Sewerage Co. S.A. (ATH:EYAPS) Has A ROE Of 8.1%
Many investors are still learning about the various metrics that can be useful when analysing a stock. This article is for those who would like to learn about Return On Equity (ROE). To keep the lesson grounded in practicality, we'll use ROE to better understand Thessaloniki Water Supply & Sewerage Co. S.A. (ATH:EYAPS).
Our data shows Thessaloniki Water Supply & Sewerage has a return on equity of 8.1% for the last year. One way to conceptualize this, is that for each €1 of shareholders' equity it has, the company made €0.081 in profit.
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View our latest analysis for Thessaloniki Water Supply & Sewerage
How Do I Calculate ROE?
The formula for return on equity is:
Return on Equity = Net Profit ÷ Shareholders' Equity
Or for Thessaloniki Water Supply & Sewerage:
8.1% = €14m ÷ €173m (Based on the trailing twelve months to December 2018.)
It's easy to understand the 'net profit' part of that equation, but 'shareholders' equity' requires further explanation. It is all earnings retained by the company, plus any capital paid in by shareholders. Shareholders' equity can be calculated by subtracting the total liabilities of the company from the total assets of the company.
What Does ROE Signify?
ROE measures a company's profitability against the profit it retains, and any outside investments. The 'return' is the yearly profit. The higher the ROE, the more profit the company is making. So, as a general rule, a high ROE is a good thing. That means it can be interesting to compare the ROE of different companies.
Does Thessaloniki Water Supply & Sewerage Have A Good Return On Equity?
One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. If you look at the image below, you can see Thessaloniki Water Supply & Sewerage has a similar ROE to the average in the Water Utilities industry classification (8.1%).
That isn't amazing, but it is respectable. ROE tells us about the quality of the business, but it does not give us much of an idea if the share price is cheap. I will like Thessaloniki Water Supply & Sewerage better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
The Importance Of Debt To Return On Equity
Virtually all companies need money to invest in the business, to grow 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 debt required for growth will boost returns, but will not impact the shareholders' equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.
Combining Thessaloniki Water Supply & Sewerage's Debt And Its 8.1% Return On Equity
Shareholders will be pleased to learn that Thessaloniki Water Supply & Sewerage has not one iota of net debt! Even though I don't think its ROE is that great, I think it's very respectable when you consider it has no debt. After all, with cash on the balance sheet, a company has a lot more optionality in good times and bad.
In Summary
Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. A company that can achieve a high return on equity without debt could be considered a high quality business. If two companies have around the same level of debt to equity, and one has a higher ROE, I'd generally prefer the one with higher ROE.
Having said that, while ROE is a useful indicator of business quality, you'll have to look at a whole range of factors to determine the right price to buy a stock. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. Check the past profit growth by Thessaloniki Water Supply & Sewerage by looking at this visualization of past earnings, revenue and cash flow.
Of course Thessaloniki Water Supply & Sewerage may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
