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Is Asahi India Glass Limited’s (NSE:ASAHIINDIA) 12% ROE Strong Compared To Its Industry?

Post Time:Feb 21,2020Classify:Company NewsView:958

One of the best investments we can make is in 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. By way of learning-by-doing, we’ll look at ROE to gain a better understanding of Asahi India Glass Limited (NSE:ASAHIINDIA).

Over the last twelve months Asahi India Glass has recorded a ROE of 12%. That means that for every ₹1 worth of shareholders’ equity, it generated ₹0.12 in profit.

How Do I Calculate ROE?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

Or for Asahi India Glass:

12% = ₹1.4b ÷ ₹12b (Based on the trailing twelve months to December 2019.)

It’s easy to understand the ‘net profit’ part of that equation, but ‘shareholders’ equity’ requires further explanation. It is the capital paid in by shareholders, plus any retained earnings. You can calculate shareholders’ equity by subtracting the company’s total liabilities from its total assets.

What Does ROE Mean?

ROE looks at the amount a company earns relative to the money it has kept within the business. The ‘return’ is the yearly profit. A higher profit will lead to a higher ROE. So, all else being equal, a high ROE is better than a low one. That means ROE can be used to compare two businesses.

Does Asahi India Glass Have A Good ROE?

One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. You can see in the graphic below that Asahi India Glass has an ROE that is fairly close to the average for the Auto Components industry (10.0%).

NSEI:ASAHIINDIA Past Revenue and Net Income, February 21st 2020
NSEI:ASAHIINDIA Past Revenue and Net Income, February 21st 2020

That’s not overly surprising. ROE can give us a view about company quality, but many investors also look to other factors, such as whether there are insiders buying shares. I will like Asahi India Glass better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

How Does Debt Impact ROE?

Most companies need money — from somewhere — to grow their profits. That cash can come from retained earnings, issuing new shares (equity), 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 used for growth will improve returns, but won’t affect the total equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.

Combining Asahi India Glass’s Debt And Its 12% Return On Equity

It’s worth noting the significant use of debt by Asahi India Glass, leading to its debt to equity ratio of 1.16. The company doesn’t have a bad ROE, but it is less than ideal tht it has had to use debt to achieve its returns. Investors should think carefully about how a company might perform if it was unable to borrow so easily, because credit markets do change over time.

Source: https://simplywall.st/sAuthor: shangyi

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