Is the ROE of Odfjell Technology Ltd. (OB:OTL) of 28% impressive?

One of the best investments we can make is in our own knowledge and skills. With that in mind, this article will work through how we can use return on equity (ROE) to better understand a company. Through learning by doing we will look at ROE to help Odfjell Technology Ltd. (OB:OTL) better understand.

ROE, or return on equity, is a useful tool for assessing how effectively a company is generating returns on the investment received from its shareholders. Put simply, it measures a company’s profitability in relation to its equity.

Our analysis indicates this OTL is potentially underrated!

How is ROE calculated?

That Formula for return on equity is:

Return on Equity = Net Income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Odfjell technology is:

28% = kr179m ÷ kr645m (Based on the trailing 12 months to June 2022).

“Yield” refers to a company’s profits over the last year. This means that for every NOK1 invested by its shareholder, the company makes a profit of NOK 0.28.

Does Odfjell technology have a good ROE?

A simple way to tell if a company has a good return on equity is to compare it to the industry average. The limitation of this approach is that some companies differ greatly from others, even within the same industry classification. As you can see in the chart below, Odfjell Technology has a higher ROE than the average (12%) in the energy services industry.

roe
OB:OTL Return on Equity November 25, 2022

We like to see that. However, keep in mind that a high ROE does not necessarily indicate efficient profit generation. Especially when a company uses high levels of leverage to fund its debt, which can boost its ROE, but the high leverage puts the company at risk. Our risk dashboard should contain the 2 risks that we have identified for the Odfjell technology.

How does debt affect ROE?

Businesses usually need to invest money to increase their profits. This money can come from retained earnings, the issuance of new shares (equity), or debt. In the first and second cases, the ROE reflects this use of cash to invest in the company. In the latter case, the use of debt will improve returns but will not change equity. In this way, the use of leverage will increase ROE even though the company’s core economics remain the same.

Odfjell Technology debt and 28% ROE

Of note is Odfjell Technology’s high level of leverage, which resulted in a leverage ratio of 2.07. Its ROE is pretty impressive, but it probably would have been lower without the use of debt. Debt increases risk and reduces options for the business going forward, so you generally want to see good returns from usage.

Conclusion

Return on equity is a way to compare the business quality of different companies. A company that can generate a high return on equity with no debt could be considered a high quality company. In general, if two companies have roughly the same leverage and one has a higher ROE, I would prefer the one with the higher ROE.

While ROE is a useful indicator of company quality, there are a number of factors you need to consider to determine the right price to buy a stock. It is important to consider other factors such as B. future earnings growth – and how much investment is required in the future. So I think it might be worth checking out free Report on analysts’ forecasts for the company.

sure, You might find a fantastic investment by looking elsewhere. So check this out free List of interesting companies.

The assessment is complex, but we help to simplify it.

find out if Odfjell technology may be over or under priced by reviewing our comprehensive analysis which includes the following Fair Value Estimates, Risks and Warnings, Dividends, Insider Trading and Financial Health.

Check out the free analysis

This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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