Should We Be Delighted With Vamos Locação de Caminhões, Máquinas e Equipamentos S.A.'s (BVMF:VAMO3) ROE Of 26%?

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). We'll use ROE to examine Vamos Locação de Caminhões, Máquinas e Equipamentos S.A. (BVMF:VAMO3), by way of a worked example.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Vamos Locação de Caminhões Máquinas e Equipamentos is:

26% = R$635m ÷ R$2.5b (Based on the trailing twelve months to March 2025).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each R$1 of shareholders' capital it has, the company made R$0.26 in profit.

See our latest analysis for Vamos Locação de Caminhões Máquinas e Equipamentos

Does Vamos Locação de Caminhões Máquinas e Equipamentos 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. As is clear from the image below, Vamos Locação de Caminhões Máquinas e Equipamentos has a better ROE than the average (7.3%) in the Transportation industry.

That is a good sign. However, bear in mind that a high ROE doesn’t necessarily indicate efficient profit generation. Aside from changes in net income, a high ROE can also be the outcome of high debt relative to equity, which indicates risk. To know the 3 risks we have identified for Vamos Locação de Caminhões Máquinas e Equipamentos visit our risks dashboard for free.

Why You Should Consider Debt When Looking At ROE

Companies usually need to invest money 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 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.

Vamos Locação de Caminhões Máquinas e Equipamentos' Debt And Its 26% ROE

It seems that Vamos Locação de Caminhões Máquinas e Equipamentos uses a huge volume of debt to fund the business, since it has an extremely high debt to equity ratio of 6.60. Its ROE is respectable, but it's not so impressive once you consider all of the debt.

Conclusion

Return on equity is useful for comparing the quality of different businesses. Companies that can achieve high returns on equity without too much debt are generally of good quality. 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.

But when a business is high quality, the market often bids it up to a price that reflects this. It is important to consider other factors, such as future profit growth -- and how much investment is required going forward. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.

Of course Vamos Locação de Caminhões Máquinas e Equipamentos 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.