Should you be impressed with the ROEs of Sangam (India) Limited (NSE: SANGAMIND)?


Many investors are still educating themselves about the various metrics that can be useful when analyzing a stock. This article is for those who want to learn more about return on equity (ROE). To keep the lesson practical, we will use ROEs to better understand Sangam (India) Limited (NSE: SANGAMIND).

ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.

Check out our latest analysis for Sangam (India)

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Sangam (India) is:

14% = ₹ 837m ₹ 5.9b (Based on the last twelve months up to September 2021).

The “return” is the annual profit. So this means that for every 1 of its shareholder’s investments, the company generates a profit of ₹ 0.14.

Does Sangam (India) have a good ROE?

By comparing a company’s ROE with its industry average, we can get a quick measure of its quality. However, this method is only useful as a rough check, as companies differ a lot within a single industry classification. Fortunately, Sangam (India) has an above-average ROE (11%) for the luxury industry.

NSEI: SANGAMIND Return on equity January 4, 2022

This is what we love to see. Keep in mind that a high ROE doesn’t always mean superior financial performance. Besides changes in net income, high ROE can also be the result of high leverage to equity, which indicates risk. You can see the 3 risks we have identified for Sangam (India) by visiting our risk dashboard for free on our platform here.

What is the impact of debt on return on equity?

Most businesses need money – from somewhere – to increase their profits. The money for the investment can come from the profits of the previous year (retained earnings), from the issuance of new shares or from loans. 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 affect total equity. So, using debt can improve ROE, but with added risk in stormy weather, metaphorically speaking.

Combine Sangam’s debt (India) with its 14% return on equity

Sangam (India) uses a large amount of debt to increase returns. It has a debt ratio of 1.01. The combination of a rather low ROE and a high recourse to debt is not particularly attractive. Debt comes with additional risk, so it’s only really worth it when a business is making decent returns from it.

Conclusion

Return on equity is useful for comparing the quality of different companies. In our books, the highest quality companies have a high return on equity, despite low leverage. If two companies have roughly the same level of debt to equity and one has a higher ROE, I would generally prefer the one with a higher ROE.

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. Check the past earnings growth of Sangam (India) by looking at this visualization of past earnings, revenue and cash flow.

Sure Sangam (India) might not be the best stock to buy. So you might want to see this free collection of other companies with high ROE and low leverage.

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 documents. Simply Wall St has no position in any of the stocks mentioned.


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