A Note On Prestige Consumer Healthcare Inc.’s (NYSE:PBH) ROE and Debt To Equity – Simply Wall St NewsSeptember 14, 2020
Many investors are still learning about the various metrics that can be useful when analysing a stock. This article is for those who would like to learn about Return On Equity (ROE). By way of learning-by-doing, we’ll look at ROE to gain a better understanding of Prestige Consumer Healthcare Inc. (NYSE:PBH).
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
See our latest analysis for Prestige Consumer Healthcare
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Prestige Consumer Healthcare is:
12% = US$152m ÷ US$1.2b (Based on the trailing twelve months to June 2020).
The ‘return’ is the yearly profit. That means that for every $1 worth of shareholders’ equity, the company generated $0.12 in profit.
Does Prestige Consumer Healthcare Have A Good Return On Equity?
By comparing a company’s ROE with its industry average, we can get a quick measure of how good it is. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. The image below shows that Prestige Consumer Healthcare has an ROE that is roughly in line with the Pharmaceuticals industry average (15%).
So while the ROE is not exceptional, at least its acceptable. While at least the ROE is not lower than the industry, its still worth checking what role the company’s debt plays as high debt levels relative to equity may also make the ROE appear high. If so, this increases its exposure to financial risk.
How Does Debt Impact ROE?
Most companies need money — from somewhere — to grow their profits. That cash can come from retained earnings, issuing new shares (equity), or debt. 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 required for growth will boost returns, but will not impact the shareholders’ equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.
Prestige Consumer Healthcare’s Debt And Its 12% ROE
Prestige Consumer Healthcare clearly uses a high amount of debt to boost returns, as it has a debt to equity ratio of 1.33. While its ROE is pretty respectable, the amount of debt the company is carrying currently is not ideal. Debt does bring extra risk, so it’s only really worthwhile when a company generates some decent returns from it.
Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. A company that can achieve a high return on equity…