Does Pipe Works L. Girakian Profil S.A. (ATH:PROFK) Create Value For Shareholders?

By
Simply Wall St
Published
August 28, 2021
ATSE:PROFK
Source: Shutterstock

One of the best investments we can make is in our own knowledge and skill set. With that in mind, this article will work through how we can use Return On Equity (ROE) to better understand a business. By way of learning-by-doing, we'll look at ROE to gain a better understanding of Pipe Works L. Girakian Profil S.A. (ATH:PROFK).

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Pipe Works L. Girakian Profil

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 Pipe Works L. Girakian Profil is:

6.3% = €247k ÷ €3.9m (Based on the trailing twelve months to December 2020).

The 'return' refers to a company's earnings over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.06 in profit.

Does Pipe Works L. Girakian Profil Have A Good ROE?

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. You can see in the graphic below that Pipe Works L. Girakian Profil has an ROE that is fairly close to the average for the Metals and Mining industry (6.3%).

roe
ATSE:PROFK Return on Equity August 29th 2021

So while the ROE is not exceptional, at least its acceptable. Although the ROE is similar to the industry, we should still perform further checks to see if the company's ROE is being boosted by high debt levels. If a company takes on too much debt, it is at higher risk of defaulting on interest payments. You can see the 4 risks we have identified for Pipe Works L. Girakian Profil by visiting our risks dashboard for free on our platform here.

The Importance Of Debt To Return On Equity

Most companies need money -- from somewhere -- to grow their profits. That cash can come from issuing shares, retained earnings, or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the use of debt will improve the returns, but will not change the equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.

Combining Pipe Works L. Girakian Profil's Debt And Its 6.3% Return On Equity

It seems that Pipe Works L. Girakian Profil uses a huge volume of debt to fund the business, since it has an extremely high debt to equity ratio of 3.21. Most investors would need a low share price to be interested in a company with low ROE and high debt to equity.

Conclusion

Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. In our books, the highest quality companies have high return on equity, despite low debt. All else being equal, a higher ROE is better.

Having said that, while ROE is a useful indicator of business quality, you'll have to look at a whole range of factors to determine the right price to buy a stock. It is important to consider other factors, such as future profit growth -- and how much investment is required going forward. You can see how the company has grow in the past by looking at this FREE detailed graph of past earnings, revenue and cash flow.

Of course Pipe Works L. Girakian Profil 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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