Should You Be Worried About Zaklad Budowy Maszyn ZREMB - Chojnice S.A.'s (WSE:ZRE) 3.7% Return On Equity?

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). To keep the lesson grounded in practicality, we'll use ROE to better understand Zaklad Budowy Maszyn ZREMB - Chojnice S.A. (WSE:ZRE).

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Zaklad Budowy Maszyn ZREMB - Chojnice

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 Zaklad Budowy Maszyn ZREMB - Chojnice is:

3.7% = zł469k ÷ zł13m (Based on the trailing twelve months to September 2022).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each PLN1 of shareholders' capital it has, the company made PLN0.04 in profit.

Does Zaklad Budowy Maszyn ZREMB - Chojnice 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. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. As shown in the graphic below, Zaklad Budowy Maszyn ZREMB - Chojnice has a lower ROE than the average (12%) in the Metals and Mining industry classification.

That certainly isn't ideal. However, a low ROE is not always bad. If the company's debt levels are moderate to low, then there's still a chance that returns can be improved via the use of financial leverage. A company with high debt levels and low ROE is a combination we like to avoid given the risk involved. To know the 5 risks we have identified for Zaklad Budowy Maszyn ZREMB - Chojnice visit our risks dashboard for free.

How Does Debt Impact Return On Equity?

Most companies need money -- from somewhere -- 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 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.

Combining Zaklad Budowy Maszyn ZREMB - Chojnice's Debt And Its 3.7% Return On Equity

While Zaklad Budowy Maszyn ZREMB - Chojnice does have some debt, with a debt to equity ratio of just 0.33, we wouldn't say debt is excessive. Its ROE is rather low, and it does use some debt, albeit not much. That's not great to see. Conservative use of debt to boost returns is usually a good move for shareholders, though it does leave the company more exposed to interest rate rises.

Conclusion

Return on equity is useful for comparing the quality of different businesses. In our books, the highest quality companies have high return on equity, despite low debt. 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.

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. 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 Zaklad Budowy Maszyn ZREMB - Chojnice by looking at this visualization of past earnings, revenue and cash flow.

But note: Zaklad Budowy Maszyn ZREMB - Chojnice 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.