A closer look at the uninspiring ROE of Air Transport Services Group, Inc. (NASDAQ:ATSG)
Many investors are still learning the different metrics that can be helpful when analyzing a stock. This article is for those who want to know more about return on equity (ROE). Learning by doing, we will look at ROE to better understand Air Transport Services Group, Inc. (NASDAQ:ATSG).
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
Check out our latest analysis for Air Transport Services Group
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Air Transport Services Group is:
11% = $119 million ÷ $1.1 billion (based on trailing 12 months to June 2021).
“Yield” refers to a company’s earnings over the past year. This means that for every dollar of shareholders’ equity, the company generated $0.11 in profit.
Does Air Transport Services Group have a good ROE?
By comparing a company’s ROE with the average for its industry, we can get a quick measure of its quality. However, this method is only useful as a rough check, as companies differ quite a bit within the same industry classification. As the image below clearly shows, Air Transport Services Group has an ROE below the average (16%) for the logistics sector.
That’s not what we like to see. However, we believe that a lower ROE could still mean that a company has the opportunity to improve its returns through the use of leverage, provided its existing debt levels are low. A highly leveraged company with a low ROE is a whole other story and a risky investment on our books. To learn about the 3 risks we have identified for Air Transport Services Group, visit our risk dashboard for free.
What is the impact of debt on return on equity?
Virtually all businesses need money to invest in the business, to increase their profits. The money for the investment can come from the previous year’s earnings (retained earnings), from issuing new shares or from borrowing. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, debt used for growth will enhance returns, but will not affect total equity. Thus, the use of debt can improve ROE, but with an additional risk in the event of a storm, metaphorically speaking.
Air Transport Services Group’s debt and its ROE of 11%
Air Transport Services Group is clearly using a high amount of debt to increase its returns, as its debt-to-equity ratio is 1.26. Its ROE is quite low, even with the use of significant debt; this is not a good result, in our view. Debt increases risk and reduces options for the business in the future, so you generally want to see good returns using it.
Return on equity is useful for comparing the quality of different companies. A company that can earn a high return on equity without going into debt could be considered a high quality company. If two companies have the same ROE, I would generally prefer the one with less debt.
But when a company is of high quality, the market often gives it a price that reflects that. It is important to consider other factors, such as future earnings growth and the amount of investment needed in the future. You might want to check out this FREE analyst forecast visualization for the company.
Sure Air Transport Services Group may not be the best stock to buy. So you might want to see this free collection of other companies that have high ROE and low debt.
This Simply Wall St article is general in nature. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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