Is Big Technologies plc (LON:BIG) a high quality stock to own?
One of the best investments we can make is in our own knowledge and skills. With that in mind, this article will explain how we can use return on equity (ROE) to better understand a business. We’ll use ROE to look at Big Technologies plc (LON: BIG), as a concrete example.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest analysis for Big Technologies
How is ROE calculated?
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 Big Technologies is:
17% = £13m ÷ £74m (based on trailing 12 months to December 2021).
The “yield” is the profit of the last twelve months. This therefore means that for every pound invested by its shareholder, the company generates a profit of 0.17 pounds.
Do big technologies 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. Fortunately, Big Technologies has an above-average ROE (14%) for the business services industry.
This is clearly a positive point. Keep in mind that a high ROE does not always mean superior financial performance. In addition to changes in net income, a high ROE can also be the result of high debt to equity, which indicates risk.
What is the impact of debt on ROE?
Most businesses need money – from somewhere – to increase their profits. This money can come from issuing stocks, retained earnings or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt necessary for growth will boost returns, but will not impact shareholders’ equity. Thus, the use of debt can improve ROE, but with an additional risk in the event of a storm, metaphorically speaking.
Combine Big Technologies debt and its 17% return on equity
Positive point for shareholders, Big Technologies has no net debt! Its ROE already suggests it’s a good business, but the fact that it’s achieved that – not borrowing – makes it worthy of further consideration, in our view. After all, when a company has a strong balance sheet, it can often find ways to invest in growth, even if it takes time.
Return on equity is useful for comparing the quality of different companies. Companies that can earn high returns on equity without too much debt are generally of good quality. All things being equal, a higher ROE is better.
But when a company is of high quality, the market often gives it a price that reflects that. 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.
But note: Big tech may not be the best stocks to buy. So take a look at this free list of interesting companies with high ROE and low debt.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.