Is Blue Square Real Estate Ltd’s (TLV:BLSR) 10.0% ROE Strong Compared To Its Industry?

Many investors are still learning about the various metrics that can be useful in analyzing a stock. This article is for those who want to learn more about return on equity (ROE). To keep the lesson hands-on, we’ll use ROE to better understand Blue Square Real Estate Ltd (TLV: BLSR).

ROE, or return on equity, is a useful tool for assessing how effectively a company can generate returns on the investments received from its shareholders. In short, ROE shows the profit each dollar generates on its equity investment.

Check out our latest analysis for Blue Square Real Estate

How do you calculate the return on equity?

The Formula for ROE is:

Return on Equity = Net Income (from continuing operations) ÷ Equity

Based on the formula above, the ROE for Blue Square Real Estate is:

10.0% = ₪ 229 million ÷ ₪ 2.3b (based on the last twelve months up to March 2021).

The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every ₪ of shareholder equity the company made a profit of ₪ 0.10.

Does Blue Square Real Estate Have a Good ROE?

Probably the easiest way to evaluate a company’s ROE is to compare it to the average in its industry. However, this method is only useful for a rough check, as companies within the same industry classification definitely differ. You can see in the graph below that Blue Square Real Estate has an ROE that is pretty close to the real estate industry average (8.8%).

TASE: BLSR return on equity June 28, 2021

The ROE, while not exceptional, is at least acceptable. Although the ROE is at least not lower than that of the industry, it is still worth checking the role that the company’s debt plays, as a high level of debt in relation to equity can also make the ROE appear high. If so, it increases the financial risk. To find out the 3 risks we have identified for Blue Square Real Estate, visit our Risk Dashboard for Free.

How does debt affect return on equity?

Virtually all businesses need money to invest in the business and grow profits. This money can come from retained earnings, the issue of new shares (equity), or debt. In the first two cases, the ROE will capture this capital investment for growth. In the latter case, using leverage improves returns but does not change equity. Thus, using debt can improve ROE, albeit with added risk in stormy weather, metaphorically speaking.

Blue Square Real Estate debt and its 10.0% ROE

Noteworthy is the high level of debt capital employed by Blue Square Real Estate, which leads to a debt to equity ratio of 1.83. With a relatively low ROE and significant leverage, it’s hard to get excited about this business at the moment. Debt increases risk and reduces options for the company in the future, so you will generally want good returns on its use.

Summary

Return on equity is a useful indicator of a company’s ability to generate profits and distribute them to shareholders. In our books, the highest quality companies have high return on equity despite low debt. All other things being equal, a higher ROE is better.

The ROE is only part of a bigger puzzle, however, as high quality companies often trade with high earnings multiples. Earnings growth rates versus expectations reflected in the stock price are especially important to consider. So I think it might be worth checking this out free these detailed graphic the previous result, sales and cash flow.

Naturally, You could find a fantastic investment by looking elsewhere. So check this out free List of interesting companies.

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