Lexibook - Linguistic Electronic System Société anonyme (EPA:ALLEX) Delivered A Better ROE Than Its Industry

By
Simply Wall St
Published
September 02, 2021
ENXTPA:ALLEX
Source: Shutterstock

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 Lexibook - Linguistic Electronic System Société anonyme (EPA:ALLEX), by way of a worked example.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Lexibook - Linguistic Electronic System Société anonyme

How To Calculate Return On Equity?

ROE 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 Lexibook - Linguistic Electronic System Société anonyme is:

30% = €1.6m ÷ €5.2m (Based on the trailing twelve months to March 2021).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.30 in profit.

Does Lexibook - Linguistic Electronic System Société anonyme 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 is clear from the image below, Lexibook - Linguistic Electronic System Société anonyme has a better ROE than the average (15%) in the Consumer Durables industry.

roe
ENXTPA:ALLEX Return on Equity September 3rd 2021

That is a good sign. With that said, a high ROE doesn't always indicate high profitability. Aside from changes in net income, a high ROE can also be the outcome of high debt relative to equity, which indicates risk. Our risks dashboardshould have the 2 risks we have identified for Lexibook - Linguistic Electronic System Société anonyme.

How Does Debt Impact Return On Equity?

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 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. That will make the ROE look better than if no debt was used.

Lexibook - Linguistic Electronic System Société anonyme's Debt And Its 30% ROE

It's worth noting the high use of debt by Lexibook - Linguistic Electronic System Société anonyme, leading to its debt to equity ratio of 1.19. While no doubt that its ROE is impressive, we would have been even more impressed had the company achieved this with lower debt. Debt does bring extra risk, so it's only really worthwhile when a company generates some decent returns from it.

Summary

Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. 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 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. Check the past profit growth by Lexibook - Linguistic Electronic System Société anonyme by looking at this visualization of past earnings, revenue and cash flow.

Of course Lexibook - Linguistic Electronic System Société anonyme 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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