Advertisement
New Zealand markets close in 4 hours 49 minutes

  • NZX 50

    11,834.82
    +31.54 (+0.27%)
     

  • NZD/USD

    0.5940
    +0.0005 (+0.09%)
     

  • NZD/EUR

    0.5546
    +0.0005 (+0.10%)
     

  • ALL ORDS

    7,937.90
    +35.90 (+0.45%)
     

  • ASX 200

    7,683.50
    +34.30 (+0.45%)
     

  • OIL

    83.46
    +0.10 (+0.12%)
     

  • GOLD

    2,336.60
    -5.50 (-0.23%)
     

  • NASDAQ

    17,471.47
    +260.59 (+1.51%)
     

  • FTSE

    8,044.81
    +20.94 (+0.26%)
     

  • Dow Jones

    38,503.69
    +263.71 (+0.69%)
     

  • DAX

    18,137.65
    +276.85 (+1.55%)
     

  • Hang Seng

    16,828.93
    +317.24 (+1.92%)
     

  • NIKKEI 225

    37,552.16
    0.00 (0.00%)
     

  • NZD/JPY

    91.8470
    +0.0810 (+0.09%)
     

Based On Its ROE, Is ironSource Ltd. (NYSE:IS) A High Quality Stock?

Simply Wall St
·3-min read

Many investors are still learning about the various metrics that can be useful when analysing a stock. This article is for those who would like to learn about Return On Equity (ROE). To keep the lesson grounded in practicality, we'll use ROE to better understand ironSource Ltd. (NYSE:IS).

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for ironSource

How Is ROE Calculated?

The formula for return on equity is:

ADVERTISEMENT

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for ironSource is:

5.7% = US$57m ÷ US$1.0b (Based on the trailing twelve months to June 2021).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.06.

Does ironSource Have A Good ROE?

By comparing a company's 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. As shown in the graphic below, ironSource has a lower ROE than the average (12%) in the Software industry classification.

roe
roe

Unfortunately, that's sub-optimal. Although, we think that a lower ROE could still mean that a company has the opportunity to better its returns with the use of leverage, provided its existing debt levels are low. When a company has low ROE but high debt levels, we would be cautious as the risk involved is too high. To know the 2 risks we have identified for ironSource visit our risks dashboard for free.

How Does Debt Impact ROE?

Most companies need money -- from somewhere -- to grow their profits. That cash can come from retained earnings, issuing new shares (equity), 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 use of debt will improve the returns, but will not change the equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.

Combining ironSource's Debt And Its 5.7% Return On Equity

Shareholders will be pleased to learn that ironSource has not one iota of net debt! Even though I don't think its ROE is that great, I think it's very respectable when you consider it has no debt. At the end of the day, when a company has zero debt, it is in a better position to take future growth opportunities.

Conclusion

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.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. 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.

Of course ironSource 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.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.