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Lindsay Australia Limited (ASX:LAU) Has A ROE Of 9.4%

Simply Wall St

One of the best investments we can make is in our own knowledge and skill set. With that in mind, this article will work through how we can use Return On Equity (ROE) to better understand a business. We'll use ROE to examine Lindsay Australia Limited (ASX:LAU), by way of a worked example.

Over the last twelve months Lindsay Australia has recorded a ROE of 9.4%. One way to conceptualize this, is that for each A$1 of shareholders' equity it has, the company made A$0.09 in profit.

Check out our latest analysis for Lindsay Australia

How Do I Calculate Return On Equity?

The formula for ROE is:


Or for Lindsay Australia:

9.4% = AU$8.9m ÷ AU$94m (Based on the trailing twelve months to June 2019.)

Most readers would understand what net profit is, but it’s worth explaining the concept of shareholders’ equity. It is the capital paid in by shareholders, plus any retained earnings. Shareholders' equity can be calculated by subtracting the total liabilities of the company from the total assets of the company.

What Does Return On Equity Mean?

ROE looks at the amount a company earns relative to the money it has kept within the business. The 'return' is the yearly profit. The higher the ROE, the more profit the company is making. So, all else equal, investors should like a high ROE. Clearly, then, one can use ROE to compare different companies.

Does Lindsay Australia Have A Good ROE?

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 Lindsay Australia has an ROE that is fairly close to the average for the Transportation industry (8.8%).

ASX:LAU Past Revenue and Net Income, December 23rd 2019

That's neither particularly good, nor bad. ROE tells us about the quality of the business, but it does not give us much of an idea if the share price is cheap. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

Why You Should Consider Debt When Looking At ROE


Lindsay Australia's Debt And Its 9.4% ROE

While Lindsay Australia does have some debt, with debt to equity of just 0.21, we wouldn't say debt is excessive. The combination of modest debt and a very respectable ROE suggests this is a business worth watching. Careful use of debt to boost returns is often very good for shareholders. However, it could reduce the company's ability to take advantage of future opportunities.

The Key Takeaway


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 you might want to take a peek at this data-rich interactive graph of forecasts for the company.

But note: Lindsay Australia 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.

