How Good Is BW Offshore Limited (OB:BWO), When It Comes To ROE? – Simply Wall St

One of the best investments we can make is in our own knowledge and skill set. With that in mind, this article will work through how we can use Return On Equity (ROE) to better understand a business. By way of learning-by-doing, well look at ROE to gain a better understanding of BW Offshore Limited (OB:BWO).

Over the last twelve months BW Offshore has recorded a ROE of 6.7%. That means that for every NOK1 worth of shareholders equity, it generated NOK0.07 in profit.

View our latest analysis for BW Offshore

The formula for ROE is:

Return on Equity = Net Profit Shareholders Equity

Or for BW Offshore:

6.7% = US$78m US$1.4b (Based on the trailing twelve months to June 2019.)

Most readers would understand what net profit is, but its worth explaining the concept of shareholders equity. It is all the money paid into the company from shareholders, plus any earnings retained. You can calculate shareholders equity by subtracting the companys total liabilities from its total assets.

ROE measures a companys profitability against the profit it retains, and any outside investments. The return is the amount earned after tax over the last twelve months. The higher the ROE, the more profit the company is making. So, as a general rule, a high ROE is a good thing. That means it can be interesting to compare the ROE of different companies.

By comparing a companys ROE with its industry average, we can get a quick measure of how good it is. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. The image below shows that BW Offshore has an ROE that is roughly in line with the Energy Services industry average (7.4%).

Thats not overly surprising. ROE tells us about the quality of the business, but it does not give us much of an idea if the share price is cheap. If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

Companies usually need to invest money to grow their profits. That cash 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, the debt required for growth will boost returns, but will not impact the shareholders equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.

BW Offshore has a debt to equity ratio of 0.95, which is far from excessive. Im not impressed with its ROE, but the debt levels are not too high, indicating the business has decent prospects. Judicious use of debt to improve returns can certainly be a good thing, although it does elevate risk slightly and reduce future optionality.

Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. A company that can achieve a high return on equity without debt could be considered a high quality business. If two companies have the same ROE, then I would generally prefer the one with less debt.

Having said that, while ROE is a useful indicator of business quality, youll have to look at a whole range of factors to determine the right price to buy a stock. The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.

If you would prefer check out another company one with potentially superior financials then do not miss thisfree list of interesting companies, that have HIGH return on equity and low debt.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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How Good Is BW Offshore Limited (OB:BWO), When It Comes To ROE? - Simply Wall St