How impressive is Jet Freight Logistics Limited’s (NSE: JETFREIGHT) ROE of 23%?
Many investors are still learning the various metrics that can be useful when analyzing a stock. This article is for those who want to learn more about return on equity (ROE). To keep the lesson grounded in practicality, we will use ROE to better understand Jet Freight Logistics Limited (NSE: JETFREIGHT).
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
Discover our latest analyzes for Jet Freight Logistics
How to calculate return on equity?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Jet Freight Logistics is:
23% = ₹ 45m ÷ ₹ 192m (based on the last twelve months up to March 2021).
The “return” is the income the business has earned over the past year. Another way to think about this is that for every ₹ 1 worth of equity, the company was able to earn ₹ 0.23 in profit.
Does Jet Freight Logistics have a good ROE?
An easy way to determine if a business is having a good return on equity is to compare it to the industry average. However, this method is only useful as a rough check, as companies differ a little within the same industry classification. Fortunately, Jet Freight Logistics has an above average ROE (6.3%) in the logistics industry.
This is clearly positive. That said, high ROE doesn’t always indicate high profitability. A higher proportion of debt in a company’s capital structure can also result in high ROE, where high debt levels can represent a huge risk. Our risk dashboards must include the 2 risks that we have identified for Jet Freight Logistics.
What is the impact of debt on ROE?
Most businesses need money – from somewhere – to grow their profits. This cash can come from retained earnings, the issuance of 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 necessary for growth will boost returns, but will not affect equity. This will make the ROE better than if no debt was used.
Jet Freight Logistics’ debt and its 23% ROE
Jet Freight Logistics clearly uses a high amount of debt to increase its returns, as it has a debt ratio of 1.51. While its ROE is respectable, it should be borne in mind that there is usually a limit on how much debt a business can use. Investors should think carefully about a company’s performance if it couldn’t borrow so easily, as credit markets change over time.
Return on equity is one way of comparing the quality of one’s business from different companies. A business that can earn a high return on equity without debt could be considered a high quality business. If two companies have roughly the same level of debt to equity and one of them has a higher ROE, I would generally prefer the one with a higher ROE.
But ROE is just one piece of a bigger puzzle, as high quality companies often trade on high income multiples. It’s important to take other factors into account, such as future profit growth – and the amount of investment needed in the future. Check the past profit growth of Jet Freight Logistics by looking at this visualization of past revenue, revenue and cash flow.
Of course Jet Freight Logistics may not be the best stock to buy. Then you might want to see this free collects other companies that have high ROE and low debt.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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