Is JOANN Inc. (NASDAQ: JOAN) high quality stock to own?
One of the best investments we can make is in our own knowledge and skills. With that in mind, this article will discuss how we can use Return on Equity (ROE) to better understand a business. To keep the lesson practical, we’ll use ROE to better understand JOANN Inc. (NASDAQ: JOAN).
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how efficiently their capital is being reinvested. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
How is the ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, JOANN’s ROE is:
56% = US $ 81 million Ã· US $ 147 million (based on the last twelve months to October 2021).
The âreturnâ is the amount earned after tax over the past twelve months. Another way to look at it is that for every dollar in equity, the company was able to make $ 0.56 in profit.
Does JOANN have a good ROE?
An easy way to determine if a company has a good return on equity is to compare it to the average in its industry. The limitation of this approach is that some companies are very different from others, even within the same industry classification. As you can see in the graph below, JOANN has an above-average ROE (31%) for the Specialty Retail sector.
NasdaqGM: JOAN Return on Equity December 4, 2021
It’s a good sign. However, keep in mind that a high ROE does not necessarily indicate efficient profit generation. Especially when a business uses high levels of leverage to finance its debt, which can increase its ROE, but high leverage puts the business at risk. To know the 4 risks that we have identified for JOANN, visit our risk dashboard free of charge.
What is the impact of debt on ROE?
Almost all businesses need money to invest in the business, to increase their profits. This liquidity can come from retained earnings, the issuance of new shares (equity) or debt. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the use of debt will improve returns, but will not affect equity. This will make the ROE better than if no debt was used.
Combine JOANN’s debt and its 56% return on equity
It appears that JOANN is using debt heavily to improve its returns, as it has an alarming debt-to-equity ratio of 5.87. Its ROE is clearly good enough, but it seems to be boosted by the company’s heavy reliance on debt.
Return on equity is a way to compare the business quality of different companies. A business that can earn a high return on equity without going into debt can be considered a high quality business. If two companies have the same ROE, I would generally prefer the one with the least amount of debt.
That said, while ROE is a useful indicator of how good a business is, you’ll need to look at a whole range of factors to determine the right price to buy a stock. Especially important to consider are the growth rates of earnings, relative to expectations reflected in the stock price. You might want to take a look at this data-rich interactive chart of the forecast for the business.
If you would rather consult with another company – one with potentially superior finances – then don’t miss this free list of interesting companies, which have a HIGH return on equity and low leverage.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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