A Closer Look At J. & B. Ladenis Bros S.A. - Minerva - Knitwear Manufacturing Company's (ATH:MIN) Uninspiring ROE

While some investors are already well versed in financial metrics (hat tip), this article is for those who would like to learn about Return On Equity (ROE) and why it is important. To keep the lesson grounded in practicality, we'll use ROE to better understand J. & B. Ladenis Bros S.A. - Minerva - Knitwear Manufacturing Company (ATH:MIN).

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing

How Do You Calculate Return On Equity?

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 J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing is:

2.1% = €86k ÷ €4.1m (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.02 in profit.

Does J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing Have A Good ROE?

By comparing a company's ROE with its industry average, we can get a quick measure of how good it is. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. As is clear from the image below, J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing has a lower ROE than the average (14%) in the Luxury industry.

Unfortunately, that's sub-optimal. Although, we think that a lower ROE could still mean that a company has the opportunity to better its returns with the use of leverage, provided its existing debt levels are low. A company with high debt levels and low ROE is a combination we like to avoid given the risk involved. You can see the 4 risks we have identified for J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing by visiting our risks dashboard for free on our platform here.

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

Combining J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing's Debt And Its 2.1% Return On Equity

It seems that J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing uses a huge volume of debt to fund the business, since it has an extremely high debt to equity ratio of 3.36. We consider it to be a negative sign when a company has a rather low ROE despite a rather high debt to equity.

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. All else being equal, a higher ROE is better.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. So I think it may be worth checking this free this detailed graph of past earnings, revenue and cash flow.

Of course J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing 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.