Is Global Education Limited’s (NSE:GLOBAL) ROE Of 28% Impressive?

Bruce Howe December 5, 2018

While some investors are already well versed in financial metrics (hat tip), this article is for those who
would like to learn about Return On Equity (ROE) and why it is important. To keep the lesson grounded
in practicality, we’ll use ROE to better understand Global Education Limited (NSE:GLOBAL).
Over the last twelve months Global Education has recorded a ROE of 28%. That means that for every ₹1
worth of shareholders’ equity, it generated ₹0.28 in profit.
See our latest analysis for Global Education

How Do I Calculate ROE?

The formula for return on equity is:
Return on Equity = Net Profit ÷ Shareholders’ Equity
Or for Global Education:
28% = 69.226609 ÷ ₹252m (Based on the trailing twelve months to March 2018.)
Most know that net profit is the total earnings after all expenses, but the concept of shareholders’
equity is a little more complicated. It is the capital paid in by shareholders, plus any retained earnings.
The easiest way to calculate shareholders’ equity is to subtract the company’s total liabilities from the
total assets.

What Does ROE Mean?

ROE looks at the amount a company earns relative to the money it has kept within the business. The
‘return’ is the yearly profit. The higher the ROE, the more profit the company is making. So, all else
equal, investors should like a high ROE. That means ROE can be used to compare two businesses.

Does Global Education Have A Good ROE?

Arguably the easiest way to assess company’s ROE is to compare it with the average in its industry.
Importantly, this is far from a perfect measure, because companies differ significantly within the same
industry classification. As you can see in the graphic below, Global Education has a higher ROE than the
average (4.2%) in the consumer services industry.

NSEI:GLOBAL Last Perf December 5th 18

That’s what I like to see. I usually take a closer look when a company has a better ROE than industry
peers. For example, I often check if insiders have been buying shares .

The Importance Of Debt To Return On Equity

Virtually all companies need money to invest in the business, to grow profits. The cash for investment
can come from prior year profits (retained earnings), issuing new shares, or borrowing. In the first two
cases, the ROE will capture this use of capital to grow. In the latter case, the debt used for growth will
improve returns, but won’t affect the total equity. In this manner the use of debt will boost ROE, even
though the core economics of the business stay the same.
Combining Global Education’s Debt And Its 28% Return On Equity
Shareholders will be pleased to learn that Global Education has not one iota of net debt! Its ROE already
suggests it is a good business, but the fact it has achieved this — and doesn’t borrowings — makes it
worthy of further consideration, in my view. At the end of the day, when a company has zero debt, it is
in a better position to take future growth opportunities.

But It’s Just One Metric

Return on equity is one way we can compare the business quality of different companies. Companies
that can achieve high returns on equity without too much debt are generally of good quality. If two
companies have around the same level of debt to equity, and one has a higher ROE, I’d generally prefer
the one with higher ROE.
Having said that, while ROE is a useful indicator of business quality, you’ll 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. Check the
past profit growth by Global Education by looking at this visualization of past earnings, revenue and cash
flow.
Of course Global Education may not be the best stock to buy. So you may wish to see
this free collection of other companies that have high ROE and low debt.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term
focused research analysis purely driven by fundamental data. Note that our analysis does not factor in
the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks
mentioned. For errors that warrant correction please contact the editor at editorial-
team@simplywallst.com.