With a return on equity of 36%, VEON Ltd. (NASDAQ: VEON) premium stock?

Many investors are still educating themselves about the various metrics that can be useful when analyzing a stock. This article is for those who want to learn more about return on equity (ROE). As a learning by doing, we’ll take a look at the ROE to better understand VEON Ltd. (NASDAQ: VEON).

Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In simpler terms, it measures a company’s profitability relative to equity.

Discover our latest analysis for VEON

How is the ROE calculated?

The formula for ROE is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, VEON’s ROE is:

36% = US $ 465 million ÷ US $ 1.3 billion (based on the last twelve months to September 2021).

The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made $ 0.36 in profit.

Does VEON have a good ROE?

Perhaps the easiest way to assess a company’s ROE is to compare it to the industry average. It is important to note that this measure is far from perfect, as companies differ considerably within a single industry classification. As you can see in the graph below, VEON has an above average ROE (3.0%) for the wireless telecommunications industry.

NasdaqGS: VEON Return on Equity December 7, 2021

This is clearly a positive point. However, keep in mind that a high ROE does not necessarily indicate efficient profit generation. Besides changes in net income, high ROE can also be the result of high leverage to equity, which indicates risk. Our risk dashboard should contain the 2 risks we have identified for VEON.

The importance of debt to return on equity

Most businesses need the money – somewhere – to increase their profits. The money for the investment can come from the profits of the previous year (retained earnings), from the issuance of new shares or from loans. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the use of debt will improve returns, but will not affect equity. In this way, the use of debt will increase the ROE, even if the basic economy of the business remains the same.

Combine VEON’s debt and its 36% return on equity

It looks like VEON is using debt heavily to improve its returns, as it has an alarming debt-to-equity ratio of 6.35. So while the business has an impressive ROE, the business might not have been able to achieve it without significant recourse to debt.

Summary

Return on equity is a useful indicator of a company’s ability to generate profits and return them to shareholders. In our books, the highest quality companies have a high return on equity, despite low leverage. If two companies have the same ROE, I would generally prefer the one with the least amount of debt.

But ROE is only one piece of a bigger puzzle, as high-quality companies often trade at high earnings multiples. Especially important to consider are the growth rates of earnings, relative to expectations reflected in the stock price. So I think it’s worth checking this out free analyst forecast report for the company.

Sure VEON may not be the best stock to buy. So you might want to see this free collection of other companies with high ROE and low leverage.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.