Should You Be Impressed By EcoRodovias Infraestrutura e Logística S.A.'s (BVMF:ECOR3) ROE?

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 EcoRodovias Infraestrutura e Logística S.A. (BVMF:ECOR3).

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for EcoRodovias Infraestrutura e Logística is:

25% = R$913m ÷ R$3.7b (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every R$1 of its shareholder's investments, the company generates a profit of R$0.25.

Check out our latest analysis for EcoRodovias Infraestrutura e Logística

Does EcoRodovias Infraestrutura e Logística 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. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. Pleasingly, EcoRodovias Infraestrutura e Logística has a superior ROE than the average (17%) in the Infrastructure industry.

That is a good sign. However, bear in mind that a high ROE doesn’t necessarily indicate efficient profit generation. A higher proportion of debt in a company's capital structure may also result in a high ROE, where the high debt levels could be a huge risk . You can see the 4 risks we have identified for EcoRodovias Infraestrutura e Logística by visiting our risks dashboard for free on our platform here.

How Does Debt Impact Return On Equity?

Most companies need money -- from somewhere -- to grow their profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt used for growth will improve returns, but won't affect the total equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.

Combining EcoRodovias Infraestrutura e Logística's Debt And Its 25% Return On Equity

We think EcoRodovias Infraestrutura e Logística uses a significant amount of debt to maximize its returns, as it has a significantly higher debt to equity ratio of 5.43. Its ROE is decent, but once I consider all the debt, I'm not really impressed.

Summary

Return on equity is one way we can compare its business quality of different companies. A company that can achieve a high return on equity without debt could be considered a high quality business. All else being equal, a higher ROE is better.

But when a business is high quality, the market often bids it up to a price that reflects this. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.

Of course EcoRodovias Infraestrutura e Logística 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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.