UK markets closed
  • NIKKEI 225

    27,049.47
    +178.20 (+0.66%)
     
  • HANG SENG

    22,418.97
    +189.45 (+0.85%)
     
  • CRUDE OIL

    112.05
    +2.48 (+2.26%)
     
  • GOLD FUTURES

    1,823.20
    -1.60 (-0.09%)
     
  • DOW

    31,130.06
    -308.20 (-0.98%)
     
  • BTC-GBP

    16,946.88
    -157.60 (-0.92%)
     
  • CMC Crypto 200

    449.35
    -0.71 (-0.16%)
     
  • ^IXIC

    11,266.71
    -257.84 (-2.24%)
     
  • ^FTAS

    4,035.24
    +31.01 (+0.77%)
     

Is John Lewis of Hungerford plc's (LON:JLH) ROE Of 26% Impressive?

  • Oops!
    Something went wrong.
    Please try again later.
·3-min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

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 John Lewis of Hungerford plc (LON:JLH), by way of a worked example.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for John Lewis of Hungerford

How Do You Calculate Return On Equity?

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 John Lewis of Hungerford is:

26% = UK£205k ÷ UK£803k (Based on the trailing twelve months to June 2021).

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 £0.26 in profit.

Does John Lewis of Hungerford Have A Good Return On Equity?

One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. The image below shows that John Lewis of Hungerford has an ROE that is roughly in line with the Specialty Retail industry average (21%).

roe
roe

So while the ROE is not exceptional, at least its acceptable. Even if the ROE is respectable when compared to the industry, its worth checking if the firm's ROE is being aided by high debt levels. If a company takes on too much debt, it is at higher risk of defaulting on interest payments. Our risks dashboardshould have the 4 risks we have identified for John Lewis of Hungerford.

The Importance Of Debt To 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 case of the first and second options, the ROE will reflect this use of cash, for growth. 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.

John Lewis of Hungerford's Debt And Its 26% ROE

John Lewis of Hungerford does use a high amount of debt to increase returns. It has a debt to equity ratio of 1.42. Its ROE is pretty impressive but, it would have probably been lower without the use of debt. 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. 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. The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. Check the past profit growth by John Lewis of Hungerford by looking at this visualization of past earnings, revenue and cash flow.

But note: John Lewis of Hungerford 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.

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.

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

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting