Is Odfjell Technology Ltd.’s rate of return on equity? (OB: OTL) an impressive 28%?
One of the best investments we can make is our own knowledge and skills. With that in mind, this article will work through how to use return on equity (ROE) to better understand the business. By learning by doing, we will look into ROE to gain a better understanding of Odfjell Technology Ltd. (OB: OTL).
Return on Equity, or Return on Equity, is a useful tool for evaluating how effective a company is at generating returns on the investment it has received from its shareholders. In simpler terms, it measures a company’s profitability in relation to shareholder equity.
Our analysis indicates that OTL is probably undervalued!
How is return on equity calculated?
The return on equity formula he is:
Return on Equity = Net profit (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, the ROE for Odfjell technology is:
28% = SEK 179 million 645 million SEK (based on the next twelve months to June 2022).
“Yield” refers to the company’s earnings over the past year. So, this means that for every NOK1 of shareholder investment, the company makes a profit of NOK 0.28.
Does the Odfjell Technology have a good return on equity?
One simple way to determine if a company has a good return on equity is to compare it to the industry average. A limitation of this approach is that some firms are very different from others, even within the same industry classification. As you can see in the chart below, Odfjell Technology has a return on equity that is above average (12%) in the energy services industry.
This is what we would like to see. However, keep in mind that a high return on equity does not necessarily indicate an effective profit. Especially when the company uses high levels of debt to finance its debt which may enhance the return on equity but the high financial leverage puts the company at risk. Our risk dashboards should contain the two risks we identified for Odfjell’s technology.
How does debt affect return on equity?
Companies usually need to invest money to grow their profits. This cash can come from retained earnings, the issuance of new shares (equity), or debt. In the first and second cases, the ROE will reflect this monetary use of investment in the business. In the latter case, the use of debt will improve returns, but it will not change equity. In this way, the use of debt will boost the return on equity, even though the basic economics of the company remain the same.
Odfjell Technology’s debt and equity return of 28%
Of note is the high use of debt by Odfjell Technology, which has resulted in its debt-to-equity ratio of 2.07. Its return on equity is very impressive, but it would likely be lower without the use of debt. Debt increases risk and reduces the options a company has in the future, so you generally want to see some good returns from using it.
Return on equity is one way we can compare the quality of business of different companies. A company that can generate a high return on equity without debt can be considered a high quality company. If two companies have approximately the same debt-to-equity level, and one of them has a higher return on equity, I generally prefer the company with the higher return on equity.
Having said that, while return on equity is a useful indicator of the quality of the business, you will have to look at a whole host of factors to determine the right price to buy the stock. It’s important to consider other factors, such as future earnings growth — and how much investment is required moving forward. So I think it might be worth checking this out Free A report on analyst expectations for the company.
naturally, You may find a great investment by looking elsewhere. So take a peek at this one Free List of interesting companies.
Evaluation is complex, but we help make it simple.
Find out if Odfjell technique potentially overvalued or undervalued by checking our comprehensive analysis, which includes Fair value estimates, risks and warnings, dividends, insider transactions and financial soundness.
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This article written by Simply Wall St is general in nature. We provide comments based on historical data and analyst predictions only using an 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 it does not take into account your objectives or financial situation. We aim to provide you with focused, long-term analysis driven by fundamental data. Note that our analysis may not include the company’s most recent price-sensitive announcements or specific materials. Wall Street simply has no position in any of the stocks mentioned.
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