Why Anmol India Limited (NSE:ANMOL) looks like a quality company

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 will use ROE to examine Anmol India Limited (NSE:ANMOL), as a concrete example.

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.

See our latest analysis for Anmol India

How do you calculate return on equity?

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 Anmol India is:

26% = ₹156m ÷ ₹604m (Based on last twelve months to March 2022).

“Yield” refers to a company’s earnings over the past year. This means that for every ₹ of equity, the company generated ₹0.26 of profit.

Does Anmol 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. As the image below clearly shows, Anmol India has a better ROE than the average (6.7%) for the commercial distributor industry.

NSEI:ANMOL Return on Equity June 17, 2022

This is clearly a positive point. That said, a high ROE does not always mean high profitability. In addition to changes in net income, a high ROE can also be the result of high debt to equity, which indicates risk. To know the 3 risks we have identified for Anmol India, visit our risk dashboard for free.

Why You Should Consider Debt When Looking at ROE

Most businesses need money – from somewhere – to increase their profits. This money 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 necessary for growth will boost returns, but will not impact equity. In this way, the use of debt will increase ROE, even though the core economics of the business remains the same.

Anmol India’s debt and its ROE of 26%

Anmol India is clearly using a high amount of debt to boost returns, as its debt-to-equity ratio is 2.96. Although its ROE is quite respectable, the amount of debt the company is currently carrying is not ideal. Investors need to think carefully about how a company would perform if it weren’t able to borrow so easily, as credit markets change over time.

Conclusion

Return on equity is a useful indicator of a company’s ability to generate profits and return them to shareholders. In our books, the highest quality companies have a high return on equity, despite low leverage. If two companies have roughly the same level of debt and one has a higher ROE, I generally prefer the one with a higher ROE.

But ROE is only one piece of a larger puzzle, as high-quality companies often trade on high earnings multiples. The rate at which earnings are likely to grow, relative to earnings growth expectations reflected in the current price, should also be considered. So I think it’s worth checking it out free this detailed graph past profits, revenue and cash flow.

Sure Anmol India may not be the best stock to buy. So you might want to see this free collection of other companies that have high ROE and low debt.

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.

About Meredith Campagna

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