With A 9.5% Return On Equity, Is Alloggio Group Limited (ASX:ALO) A Quality Stock?




  • In Business
  • 2022-09-29 20:14:21Z
  • By Simply Wall St.
 

While some investors are already well versed in financial metrics (hat tip), this article is for those who would like to learn about Return On Equity (ROE) and why it is important. By way of learning-by-doing, we'll look at ROE to gain a better understanding of Alloggio Group Limited (ASX:ALO).

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Alloggio Group

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Alloggio Group is:

9.5% = AU$2.0m ÷ AU$21m (Based on the trailing twelve months to June 2022).

The 'return' is the income the business earned over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.09.

Does Alloggio Group Have A Good Return On Equity?

Arguably the easiest way to assess company's ROE is to compare it with the average in its industry. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. As is clear from the image below, Alloggio Group has a lower ROE than the average (14%) in the Hospitality industry.

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. Our risks dashboard should have the 2 risks we have identified for Alloggio Group.

How Does Debt Impact ROE?

Virtually all companies need money to invest in the business, to grow profits. That cash 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 use of debt will improve the returns, but will not change the equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.

Alloggio Group's Debt And Its 9.5% ROE

Alloggio Group has a debt to equity ratio of 0.29, which is far from excessive. Its ROE isn't particularly impressive, but the debt levels are quite modest, so the business probably has some real potential. Judicious use of debt to improve returns can certainly be a good thing, although it does elevate risk slightly and reduce future optionality.

Summary

Return on equity is useful for comparing the quality of different businesses. Companies that can achieve high returns on equity without too much debt are generally of good quality. If two companies have around the same level of debt to equity, and one has a higher ROE, I'd generally prefer the one with higher ROE.

Having said that, while ROE is a useful indicator of business quality, you'll have to look at a whole range of factors to determine the right price to buy a stock. 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. Check the past profit growth by Alloggio Group by looking at this visualization of past earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies.

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

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.

Join A Paid User Research Session
You'll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here

COMMENTS

More Related News

Will Weakness in Nemetschek SE
Will Weakness in Nemetschek SE's (ETR:NEM) Stock Prove Temporary Given Strong Fundamentals?

Nemetschek (ETR:NEM) has had a rough three months with its share price down 19%. But if you pay close attention, you...

Is Comet Holding AG
Is Comet Holding AG's (VTX:COTN) Latest Stock Performance A Reflection Of Its Financial Health?

Comet Holding's (VTX:COTN) stock is up by a considerable 21% over the past month. Since the market usually pay for a...

Is Kawan Food Berhad
Is Kawan Food Berhad's (KLSE:KAWAN) Recent Stock Performance Influenced By Its Financials In Any Way?

Kawan Food Berhad's (KLSE:KAWAN) stock is up by 2.8% over the past three months. We wonder if and what role the...

Declining Stock and Decent Financials: Is The Market Wrong About Coventry Group Ltd (ASX:CYG)?
Declining Stock and Decent Financials: Is The Market Wrong About Coventry Group Ltd (ASX:CYG)?

With its stock down 6.4% over the past month, it is easy to disregard Coventry Group (ASX:CYG). However, stock prices...

Villars Holding S.A.
Villars Holding S.A.'s (VTX:VILN) Has Performed Well But Fundamentals Look Varied: Is There A Clear Direction For The Stock?

Villars Holding's (VTX:VILN) stock up by 2.6% over the past three months. However, the company's financials look a bit...

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply

Comments

Top News: Business