Is Desenio Group AB (publ) (STO:DSNO) a high quality stock to own?
Many investors are still learning the different metrics that can be helpful when analyzing a stock. This article is for those who want to know more about return on equity (ROE). We’ll use ROE to look at Desenio Group AB (publ) (STO:DSNO), as a real-life example.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simple terms, it is used to assess the profitability of a company in relation to its equity.
Discover our latest analysis for Desenio Group
How is ROE calculated?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Desenio Group is:
22% = 57 million kr ÷ 261 million kr (based on the last twelve months until December 2021).
The “return” is the annual profit. This means that for every SEK 1 worth of equity, the company has generated SEK 0.22 of profit.
Does the Desenio Group have a good return on equity?
Perhaps the easiest way to assess a company’s ROE is to compare it to the industry average. The limitation of this approach is that some companies are quite different from others, even within the same industrial classification. Fortunately, Desenio Group has an ROE above the average (9.3%) of the online retail sector.
It’s a good sign. Keep in mind that a high ROE does not always mean superior financial performance. A higher proportion of debt in a company’s capital structure can also result in a high ROE, where high debt levels could be a huge risk. To know the 3 risks we have identified for Desenio Group, visit our risk dashboard for free.
Why You Should Consider Debt When Looking at ROE
Companies generally need to invest money to increase their profits. This money can come from issuing shares, retained earnings or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, debt used for growth will enhance returns, but will not affect total equity. In this way, the use of debt will increase ROE, even though the core economics of the business remains the same.
The debt of the Desenio group and its ROE of 22%
It seems that the Desenio Group uses a huge volume of debt to finance the company, as it has an extremely high debt ratio of 4.12. Its ROE is certainly quite good, but it seems to be boosted by the company’s extensive use of debt.
Return on equity is useful for comparing the quality of different companies. A company that can earn a high return on equity without going into debt could be considered a high quality company. All things being equal, a higher ROE is better.
That said, while ROE is a useful indicator of a company’s quality, you’ll need to consider a whole host of factors to determine the right price to buy a stock. It is important to consider other factors, such as future earnings growth and the amount of investment needed in the future. You might want to take a look at this data-rich interactive chart of the company’s forecast.
Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.