Is the 8.1% ROE of Go Fashion (India) Limited (NSE: GOCOLORS) above average?

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. Learning by doing, we will look at ROE to better understand Go Fashion (India) Limited (NSE:GOCOLORS).

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

Check out our latest analysis for Go Fashion (India)

How is ROE calculated?

Return on equity can be calculated using the formula:

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

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

8.1% = ₹356 million ÷ ₹4.4 billion (based on the last twelve months to March 2022).

“Yield” is the income the business has earned over the past year. Another way to think about this is that for every ₹1 worth of equity, the company was able to make a profit of ₹0.08.

Does Go Fashion (India) have a good return on equity?

A simple way to determine if a company has a good return on equity is to compare it to the average for its industry. It is important to note that this measure is far from perfect, as companies differ significantly within the same industry classification. You can see in the graph below that Go Fashion (India) has an ROE quite close to the average for the specialized distribution industry (7.1%).

NSEI:GOCOLORS Return on Equity August 2, 2022

So, although the ROE is not exceptional, it is at least acceptable. Even if the ROE is respectable compared to the industry, it is worth checking whether the company’s ROE is helped by high debt levels. If true, this is more an indication of risk than potential.

The Importance of Debt to Return on Equity

Most businesses need money – from somewhere – to increase their profits. The money for the investment can come from the previous year’s earnings (retained earnings), from issuing new shares or from borrowing. In the first and second case, the ROE will reflect this use of cash for investment in the business. In the latter case, the debt necessary for growth will boost returns, but will not impact equity. This will make the ROE better than if no debt was used.

Combine the debt of Go Fashion (India) and its return on equity of 8.1%

Positive point for shareholders, Go Fashion (India) has no net debt! So even though I find his ROE to be rather low, at least he didn’t use any debt. Ultimately, when a company has zero debt, it is better positioned to seize future growth opportunities.

Summary

Return on equity is a way to compare the business quality of different companies. In our books, the highest quality companies have a high return on equity, despite low leverage. If two companies have the same ROE, I would generally prefer the one with less debt.

But ROE is only one piece of a larger puzzle, as high-quality companies often trade on high earnings multiples. It is important to consider other factors, such as future earnings growth and the amount of investment needed in the future. So I think it’s worth checking it out free analyst forecast report for the company.

Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies.

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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