Many investors are still learning about the various metrics that can be useful when analyzing a stock. This article is for those who would like to learn about Return On Equity (ROE) and how it can be used to better understand Enphase Energy, Inc. (NASDAQ:ENPH).
Return on equity, or ROE, is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
ROE can be calculated by using the formula: Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity. For Enphase Energy, the ROE is 30%, based on the trailing twelve months to March 2024. This means that for every $1 worth of shareholders’ equity, the company generated $0.30 in profit.
By comparing a company’s ROE with its industry average, we can get a quick measure of how good it is. Enphase Energy has a higher ROE than the average (15%) in the Semiconductor industry, which is a positive sign.
It’s worth noting that Enphase Energy has a debt to equity ratio of 1.40, indicating a high use of debt. While its ROE is impressive, it would have likely been lower without the use of debt. Debt can bring extra risk, so it’s important for a company to generate decent returns from it.
Return on equity is useful for comparing the quality of different businesses. In general, higher quality companies have high return on equity, despite low debt. It’s important to consider profit growth rates and analyst forecasts when evaluating a stock for investment.
This article by Simply Wall St provides commentary based on historical data and analyst forecasts using an unbiased methodology. It does not constitute financial advice and does not take into account individual objectives or financial situations. Simply Wall St aims to bring long-term focused analysis driven by fundamental data.