A closer look at Arcure SA’s (EPA:ALCUR) impressive ROE.

Many investors are still learning about the various metrics that can be useful when analyzing a stock. This article is for those who want to know more about Return On Equity (ROE). To keep the lesson practical, we will use ROE to better understand Arcure SA (EPA:ALCUR).

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it shows how successful the company is in converting shareholder investments into profits.

Check out our latest analysis for Arcure

How to 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 formula above, the ROE for Arcure is:

35% = €1.8 million ÷ €5.2 million (based on the last twelve months to December 2023).

The ‘return’ is the profit over the past twelve months. Another way to think of that is that for every $1 of equity, the company was able to make $0.35 in profit.

Does Arcure have a good ROE?

By comparing a company’s ROE to the industry average, we can quickly gauge how good it is. Importantly, this is far from a perfect measure, as companies vary significantly within the same industry classification. Fortunately, Arcure has a higher ROE than the average (15%) in the electrical industry.

That’s what we like to see. That said, a high ROE does not always indicate high profitability. A higher proportion of debt in a company’s capital structure can also result in a high ROE, with high debt levels being a huge risk. You can view the 3 risks that we have identified for Arcure on our website risk dashboard for free on our platform here.

How does debt affect equity?

Most companies need money – from somewhere – to grow their profits. That money can come from issuing stock, retained earnings, or debt. In the first and second cases, the ROE will reflect this use of cash for investing in the business. In the latter case, the debt used for growth will improve returns but will not impact total equity. This will make the ROE look better than if no debt were used.

Combining Arcure’s debt and 35% return on equity

Arcure is clearly using a large amount of debt to boost returns, as it has a debt-to-equity ratio of 1.59. There’s no doubt that the ROE is impressive, but it’s worth keeping in mind that the metric could have been lower if the company reduced its debt. Debt increases risk and reduces the options for the business in the future, so you generally want to see a good return from taking on debt.

Conclusion

Return on equity is one way we can compare the business quality of different companies. Companies that can achieve a high return on equity without too much debt are generally of good quality. If two companies have the same ROE, I would generally prefer the one with less debt.

But if a company is of high quality, the market often offers a price for it that reflects this. It is important to take other factors into account, such as future profit growth – and how much investment will be needed in the future. So you might want to check out this FREE visualization of analyst forecasts for the company.

But watch out: Arcure may not be the best stock to buy. So take a look at this free list of interesting companies with a high return on equity and a low debt burden.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.