Let’s look at Tata Power Company Limited (NSE:TATAPOWER) ROE | Daily News Byte

Many investors also learn about various metrics that can be useful when analyzing stocks. This article is for those who want to learn about Return On Equity (ROE). To keep the lessons in practice, we will use ROE to better understand Tata Power Company Limited (NSE:TATAPOWER).

Return on Equity or ROE is a test of how a company is growing its value and managing investors’ money effectively. In other words, it is a profit ratio that measures the rate of return on capital provided by the company’s shareholders.

Our analysis indicates that TATAPOWER MAY BE OVERVALUED!

How to calculate return on capital?

Yes Formula for ROE is:

Return on Equity = Net profit (from continuing operations) ÷ Shareholder’s equity

So, according to the formula above, the ROE for Tata Power is:

11% = ₹30b ÷ ₹267b (based on twelve month extension to June 2022).

‘Return’ is annual profit. Another way to think about it is that for every ₹1 worth of shares, the company can earn ₹0.11 in profit.

Does Tata Power have a good ROE?

By comparing a company’s ROE to its industry average, we can quickly gauge how well it is doing. Importantly, this is far from a perfect measure, as companies vary greatly within the same industry classification. You can see in the graphic below that Tata Power has an ROE that is quite close to the average for the Power Utilities industry (9.5%).

So while ROE is not exceptional, it is at least acceptable. Although ROE is respectable compared to the industry, it is worth checking that the company’s ROE is aided by high debt levels. If a company has too much debt, there is a high risk of defaulting on interest payments. Our risk dashboard should have 2 risks that we have identified for Tata Power.

Why you should consider debt when looking at ROE

Almost all companies need money to invest in business, grow profit. That cash can come from issuing shares, retained earnings, or debt. In the first and second cases, ROE will reflect the use of this cash for investment in the business. In the latter case, the debt used for growth will improve the return, but will not affect the total assets. That would make ROE look better than if there were no debt.

Tata Power’s debt and its 11% ROE

Tata Power uses high debt to increase returns. It has a debt to equity ratio of 1.94. The combination of lower ROE and the use of significant debt is not particularly attractive. Debt brings extra risk, so it’s really worth it when the company generates a decent return from it.

Summary

Stock returns are one way we can compare the business quality of different companies. Companies that achieve a high return on capital without excessive debt are generally of good quality. If two companies have the same level of debt to equity, and one company has a higher ROE, I generally prefer the company with the higher ROE.

But when the business is of high quality, the market often offers a price that reflects this. The rate of profit growth, relative to expectations reflected in the price of the stock, is particularly important to consider. So I think it might be worth checking this out Free Company analyst forecast report.

Of course, You may find an excellent investment by looking elsewhere. So take a look at this Free A list of interesting companies.

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