Why CVR Energy, Inc. (NYSE:CVI) Looks Like A Quality Company




  • In Business
  • 2022-10-03 11:40:14Z
  • 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. To keep the lesson grounded in practicality, we'll use ROE to better understand CVR Energy, Inc. (NYSE:CVI).

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for CVR Energy

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for CVR Energy is:

49% = US$523m ÷ US$1.1b (Based on the trailing twelve months to June 2022).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.49 in profit.

Does CVR Energy Have A Good Return On Equity?

One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. As you can see in the graphic below, CVR Energy has a higher ROE than the average (26%) in the Oil and Gas industry.

That's what we like to see. However, bear in mind that a high ROE doesn't necessarily indicate efficient profit generation. Aside from changes in net income, a high ROE can also be the outcome of high debt relative to equity, which indicates risk. Our risks dashboardshould have the 3 risks we have identified for CVR Energy.

How Does Debt Impact ROE?

Companies usually need to invest money to grow their profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. In the first and second cases, the ROE will reflect this use of cash for investment in the business. In the latter case, the debt used for growth will improve returns, but won't affect the total equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.

CVR Energy's Debt And Its 49% ROE

CVR Energy clearly uses a high amount of debt to boost returns, as it has a debt to equity ratio of 1.46. Its ROE is pretty impressive but, it would have probably been lower without the use of debt. Debt does bring extra risk, so it's only really worthwhile when a company generates some decent returns from it.

Conclusion

Return on equity is useful for comparing the quality of different businesses. In our books, the highest quality companies have high return on equity, despite low debt. 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.

But when a business is high quality, the market often bids it up to a price that reflects this. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So I think it may be worth checking this free report on analyst forecasts for the company.

Of course CVR Energy 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.

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

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...

Amtel Holdings Berhad
Amtel Holdings Berhad's (KLSE:AMTEL) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Amtel Holdings Berhad's (KLSE:AMTEL) stock is up by a considerable 30% over the past three months. We wonder if and...

Is Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited
Is Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited's (SGX:T14) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Tianjin Pharmaceutical Da Ren Tang Group's (SGX:T14) stock is up by a considerable 5.1% over the past month. Given that...

Rex Trueform Group Limited
Rex Trueform Group Limited's (JSE:RTN) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Rex Trueform Group's (JSE:RTN) stock is up by 8.6% over the past three months. However, we decided to study the...

Is Isetan (Singapore) Limited
Is Isetan (Singapore) Limited's (SGX:I15) Stock On A Downtrend As A Result Of Its Poor Financials?

With its stock down 15% over the past three months, it is easy to disregard Isetan (Singapore) (SGX:I15). To decide if...

Leave a Comment

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

Cancel reply

Comments

Top News: Business