Advertisement
Singapore markets closed

  • Straits Times Index

    3,300.00
    -4.00 (-0.12%)
     

  • S&P 500

    5,487.03
    +13.80 (+0.25%)
     

  • Dow

    38,834.86
    +56.76 (+0.15%)
     

  • Nasdaq

    17,862.23
    +5.21 (+0.03%)
     

  • Bitcoin USD

    66,287.34
    +1,127.89 (+1.73%)
     

  • CMC Crypto 200

    1,378.08
    -4.58 (-0.33%)
     

  • FTSE 100

    8,234.53
    +29.42 (+0.36%)
     

  • Gold

    2,353.60
    +6.70 (+0.29%)
     

  • Crude Oil

    81.70
    +0.13 (+0.16%)
     

  • 10-Yr Bond

    4.2170
    0.0000 (0.00%)
     

  • Nikkei

    38,633.02
    +62.26 (+0.16%)
     

  • Hang Seng

    18,335.32
    -95.07 (-0.52%)
     

  • FTSE Bursa Malaysia

    1,592.69
    -7.10 (-0.44%)
     

  • Jakarta Composite Index

    6,819.32
    +92.40 (+1.37%)
     

  • PSE Index

    6,344.56
    -21.47 (-0.34%)
     

Is Unitil Corporation's (NYSE:UTL) ROE Of 9.5% Impressive?

editorial-team@simplywallst.com (Simply Wall St)
·3-min read

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 Unitil Corporation (NYSE:UTL).

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Unitil

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

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

ADVERTISEMENT

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

9.5% = US$48m ÷ US$511m (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.09.

Does Unitil 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. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. You can see in the graphic below that Unitil has an ROE that is fairly close to the average for the Integrated Utilities industry (9.4%).

roe
roe

That isn't amazing, but it is respectable. Although the ROE is similar to the industry, we should still perform further checks to see if the company's ROE is being boosted by high debt levels. If so, this increases its exposure to financial risk. To know the 2 risks we have identified for Unitil visit our risks dashboard for free.

Why You Should Consider Debt When Looking At ROE

Most companies need money -- from somewhere -- to grow their profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the use of debt will improve the returns, but will not change the equity. That will make the ROE look better than if no debt was used.

Unitil's Debt And Its 9.5% ROE

Unitil does use a high amount of debt to increase returns. It has a debt to equity ratio of 1.34. The combination of a rather low ROE and significant use of debt is not particularly appealing. Debt increases risk and reduces options for the company in the future, so you generally want to see some good returns from using it.

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.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. It is important to consider other factors, such as future profit growth -- and how much investment is required going forward. So I think it may be worth checking this free report on analyst forecasts for the company.

But note: Unitil may not be the best stock to buy. So take a peek at this free list of interesting companies with 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.

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