Stock Analysis

Is Equinix's 6.3% ROE Providing Long-Term Shareholder Value?

Published
NasdaqGS:EQIX
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). To keep the lesson grounded in practicality, we'll use ROE to better understand Equinix, Inc. (NASDAQ:EQIX).

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.

View our latest analysis for Equinix

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 Equinix is:

6.3% = US$699m ÷ US$11b (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 $1 of shareholders' capital it has, the company made $0.06 in profit.

Does Equinix 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. You can see in the graphic below that Equinix has an ROE that is fairly close to the average for the REITs industry (6.8%).

roe
NasdaqGS:EQIX Return on Equity January 25th 2023

That isn't amazing, but it is respectable. While at least the ROE is not lower than the industry, its still worth checking what role the company's debt plays as high debt levels relative to equity may also make the ROE appear high. If a company takes on too much debt, it is at higher risk of defaulting on interest payments. To know the 5 risks we have identified for Equinix visit our risks dashboard for free.

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 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 Equinix's Debt And Its 6.3% Return On Equity

Equinix does use a high amount of debt to increase returns. It has a debt to equity ratio of 1.13. With a fairly low ROE, and significant use of debt, it's hard to get excited about this business at the moment. 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. A company that can achieve a high return on equity without debt could be considered a high quality business. If two companies have the same ROE, then I would generally prefer the one with less debt.

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. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.

If you would prefer check out another company -- one with potentially superior financials -- then do not miss this free list of interesting companies, that have HIGH return on equity and low debt.

What are the risks and opportunities for Equinix?

Equinix (Nasdaq: EQIX) is the world’s digital infrastructure company, enabling digital leaders to harness a trusted platform to bring together and interconnect the foundational infrastructure that powers their success.

View Full Analysis

Rewards

  • Trading at 22.9% below our estimate of its fair value

  • Earnings are forecast to grow 19.65% per year

  • Earnings grew by 63.3% over the past year

Risks

  • Interest payments are not well covered by earnings

  • Shareholders have been diluted in the past year

  • Significant insider selling over the past 3 months

  • Large one-off items impacting financial results

View all Risks and Rewards

Share Price

Market Cap

1Y Return

View Company Report