Read this before you evaluate Glunz & Jensen Holding A / S (CPH: GJ) ROE

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While some investors are already well versed with financial metrics (hat tip), this article is for those who want to learn more about return on equity (ROE) and why it’s important. To keep the lesson hands-on, we’ll use ROE to better understand Glunz & Jensen Holding A / S (CPH: GJ).

Return on Equity, or ROE, is an important metric for assessing how efficiently a company’s management is using the company’s capital. Put simply, it evaluates the profitability of a company in relation to its equity.

Check out our latest analysis for Glunz & Jensen Holding

How do you calculate the return on equity?

the Formula for return on equity is:

Return on Equity = Net Income (from continuing operations) ÷ Equity

Based on the above formula, the ROE for Glunz & Jensen Holding is:

1.2% = 855,000 kr ÷ 74 million kr (based on the last twelve months until March 2021).

The “return” is the income that the company has earned over the past year. One way to conceptualize this is that for every DKK 1 in shareholder capital, the company made a profit of DKK 0.01.

Does Glunz & Jensen Holding have a good ROE?

An easy way to tell 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 very different from others, even within the same industry classification. If you look at the picture below you can see that Glunz & Jensen Holding has a lower than average ROE (11%) in the machinery industry classification.

CPSE: FY return on equity October 22, 2021

That is certainly not ideal. However, we believe that a lower ROE could still mean that a company has the opportunity to improve its returns through leverage, provided its existing debt is low. If a company has a low ROE but high debt, we would be cautious as the risk involved is too high. Our risk dashboard should contain the 3 risks that we have identified for Glunz & Jensen Holding.

The importance of debt to return on equity

Virtually all businesses need money to invest in the business and grow profits. This money can come from retained earnings, the issue of new shares (equity), or debt. In the first and second cases, the ROE reflects this use of cash to invest in the company. In the latter case, the debt required for growth will increase returns but not affect equity. Thus, using debt can improve ROE, albeit with added risk in stormy weather, metaphorically speaking.

Combination of Glunz & Jensen Holding’s debt and its 1.2% return on equity

Glunz & Jensen Holding uses high debt to increase returns. The ratio of debt to equity is 1.18. Return on Equity (ROE) is relatively low even when using significant debt; in our opinion this is not a good result. Debt increases risk and reduces options for the company in the future, so in general you want to get a good return on its usage.

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Return on equity is useful for comparing the quality of different companies. Companies that can achieve high returns on equity without excessive debt are typically of good quality. In general, if two companies have roughly the same debt-to-equity ratio and one has a higher ROE, I’d prefer the company with a higher ROE.

While ROE is a useful indicator of company quality, there are a number of factors you need to consider in order to determine the right price to buy a stock. Also to consider is the expected rate of earnings growth in relation to earnings growth expectations reflected in the current price. You can see how the company has grown in the past by checking out this one for FREE detailed graphic the previous result, sales and cash flow.

Naturally Glunz & Jensen Holding may not be the best stock to buy. You might want to see this for free Confiscation of other companies with high ROE and low debt.

This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.

Do you have any feedback on this article? Concerned about the content? Get in touch directly with us. Alternatively, send an email to the editorial team (at) simplywallst.com.


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