Should you be excited about the 27% return on equity of Marfrig Global Foods SA (BVMF: MRFG3)?
While some investors are already familiar with financial metrics (hat trick), this article is for those who want to learn more about return on equity (ROE) and why it matters. To keep the lesson grounded in practicality, we will use ROE to better understand Marfrig Global Foods SA (BVMF:MRFG3).
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 other words, it reveals the company’s success in turning shareholders’ investments into profits.
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How to calculate return on equity?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Marfrig Global Foods is:
27% = R$8.1 billion ÷ R$30 billion (based on the last twelve months until June 2022).
“Yield” is the income the business has earned over the past year. This means that for every R$ of equity, the company generated a profit of R$0.27.
Does Marfrig Global Foods have a good ROE?
Perhaps the easiest way to assess a company’s ROE is to compare it to the industry average. It is important to note that this measure is far from perfect, as companies differ significantly within the same industry classification. As you can see in the graph below, Marfrig Global Foods has an above average ROE (21%) for the food industry.
That’s what we like to see. That said, a high ROE does not always mean high profitability. 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. Our risk dashboard should include the 4 risks we have identified for Marfrig Global Foods.
The Importance of Debt to Return on Equity
Most businesses need money – from somewhere – to increase their profits. This money can come from issuing shares, retained earnings 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, debt used for growth will enhance returns, but will not affect total equity. So using debt can improve ROE, but with the added risk of stormy weather, metaphorically speaking.
Marfrig Global Foods’ debt and its ROE of 27%
Of note is the heavy use of debt by Marfrig Global Foods, leading to its debt-to-equity ratio of 1.93. While its ROE is respectable, it’s worth bearing in mind that there’s usually a limit to the amount of debt a company can use. Investors need to think carefully about how a company would perform if it weren’t able to borrow so easily, as credit markets change over time.
Return on equity is a useful indicator of a company’s ability to generate profits and return them to shareholders. Companies that can earn high returns 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.
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. The rate at which earnings are likely to grow, relative to earnings growth expectations reflected in the current price, should also be considered. You might want to check out this FREE analyst forecast visualization for the company.
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.
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