Nath Bio-Genes (India) Limited (NSE:NATHBIOGEN) Delivered A Weaker ROE Than Its Industry

Simply Wall St

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 Nath Bio-Genes (India) Limited (NSE:NATHBIOGEN).

Over the last twelve months Nath Bio-Genes (India) has recorded a ROE of 7.0%. Another way to think of that is that for every ₹1 worth of equity in the company, it was able to earn ₹0.070.


Check out our latest analysis for Nath Bio-Genes (India)

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit ÷ Shareholders' Equity

Or for Nath Bio-Genes (India):

7.0% = ₹349m ÷ ₹5.0b (Based on the trailing twelve months to December 2018.)

It's easy to understand the 'net profit' part of that equation, but 'shareholders' equity' requires further explanation. It is all the money paid into the company from shareholders, plus any earnings retained. 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?


Does Nath Bio-Genes (India) 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. As shown in the graphic below, Nath Bio-Genes (India) has a lower ROE than the average (9.0%) in the Food industry classification.

NSEI:NATHBIOGEN Past Revenue and Net Income, May 26th 2019

Unfortunately, that's sub-optimal. We'd prefer see an ROE above the industry average, but it might not matter if the company is undervalued. Still, shareholders might want to check if insiders have been selling.

How Does Debt Impact ROE?


Nath Bio-Genes (India)'s Debt And Its 7.0% ROE

While Nath Bio-Genes (India) does have a tiny amount of debt, with debt to equity of just 0.097, we think the use of debt is very modest. Its ROE is certainly on the low side, and since it already uses debt, we're not too excited about the company. 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.

But It's Just One Metric

Return on equity is one way we can compare the business quality of different companies. In my book the highest quality companies have high return on equity, despite low debt. All else being equal, a higher ROE is better.


Of course Nath Bio-Genes (India) 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.

