Stock Analysis

Can Siili Solutions Oyj (HEL:SIILI) Improve Its Returns?

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HLSE:SIILI
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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 Siili Solutions Oyj (HEL:SIILI), 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Siili Solutions Oyj

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Siili Solutions Oyj is:

8.8% = €1.9m ÷ €22m (Based on the trailing twelve months to June 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.09 in profit.

Does Siili Solutions Oyj Have A Good ROE?

Arguably the easiest way to assess company's ROE is to compare it with the average in 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 shown in the graphic below, Siili Solutions Oyj has a lower ROE than the average (14%) in the IT industry classification.

roe
HLSE:SIILI Return on Equity January 26th 2022

That certainly isn't ideal. That being said, a low ROE is not always a bad thing, especially if the company has low leverage as this still leaves room for improvement if the company were to take on more debt. When a company has low ROE but high debt levels, we would be cautious as the risk involved is too high. You can see the 4 risks we have identified for Siili Solutions Oyj by visiting our risks dashboard for free on our platform here.

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 case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the debt required for growth will boost returns, but will not impact the shareholders' equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.

Siili Solutions Oyj's Debt And Its 8.8% ROE

It's worth noting the high use of debt by Siili Solutions Oyj, leading to its debt to equity ratio of 1.50. With a fairly low ROE, and significant use of debt, it's hard to get excited about this business at the moment. 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.

Conclusion

Return on equity is one way we can compare its business quality of different companies. Companies that can achieve high returns on equity without too much debt are generally of good quality. If two companies have the same ROE, then I would generally prefer the one with less debt.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. 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 Siili Solutions Oyj by looking at this visualization of past earnings, revenue and cash flow.

But note: Siili Solutions Oyj may not be the best stock to buy. So take a peek at this free list of interesting companies with high ROE and low debt.

Valuation is complex, but we're helping make it simple.

Find out whether Siili Solutions Oyj is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About HLSE:SIILI

Siili Solutions Oyj

Siili Solutions Oyj designs, builds, and maintains digital services in Finland and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation5
Future Growth3
Past Performance5
Financial Health5
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Undervalued with solid track record.