How Good Is Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco (EPA:BAIN), When It Comes To ROE?

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). We'll use ROE to examine Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco (EPA:BAIN), by way of a worked example.

Our data shows Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco has a return on equity of 3.7% for the last year. That means that for every €1 worth of shareholders' equity, it generated €0.04 in profit.

View our latest analysis for Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco

How Do You Calculate ROE?

The formula for ROE is:

Return on Equity = Net Profit ÷ Shareholders' Equity

Or for Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco:

3.7% = €25m ÷ €685m (Based on the trailing twelve months to September 2019.)

It's easy to understand the 'net profit' part of that equation, but 'shareholders' equity' requires further explanation. It is the capital paid in by shareholders, plus any retained earnings. Shareholders' equity can be calculated by subtracting the total liabilities of the company from the total assets of the company.

What Does Return On Equity Signify?

ROE looks at the amount a company earns relative to the money it has kept within the business. The 'return' is the amount earned after tax over the last twelve months. A higher profit will lead to a higher ROE. So, all else equal, investors should like a high ROE. That means it can be interesting to compare the ROE of different companies.

Does Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco 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. You can see in the graphic below that Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco has an ROE that is fairly close to the average for the Hospitality industry (4.3%).

ENXTPA:BAIN Past Revenue and Net Income, December 15th 2019

That isn't amazing, but it is respectable. ROE doesn't tell us if the share price is low, but it can inform us to the nature of the business. For those looking for a bargain, other factors may be more important. I will like Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

How Does Debt Impact Return On Equity?

Most companies need money -- from somewhere -- to grow their profits. That cash can come from retained earnings, issuing 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 required for growth will boost returns, but will not impact the shareholders' equity. That will make the ROE look better than if no debt was used.

Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco's Debt And Its 3.7% ROE

Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco has a debt to equity ratio of 0.36, which is far from excessive. Its ROE isn't particularly impressive, but the debt levels are quite modest, so the business probably has some real potential. Judicious use of debt to improve returns can certainly be a good thing, although it does elevate risk slightly and reduce future optionality.

The Bottom Line On ROE

Return on equity is one way we can compare the business quality of different companies. 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. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. 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 Société Anonyme des Bains de Mer et du Cercle des Étrangers à Monaco 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.