Should you be worried about the 11% return on equity of Air Transport Services Group, Inc. (NASDAQ: ATSG)?

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). We’ll use the ROE to take a look at Air Transport Services Group, Inc. (NASDAQ: ATSG), using a real-world example.

Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

See our latest analysis for Air Transport Services Group

How do you calculate return on equity?

Return on equity can be calculated using the formula:

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

Thus, based on the above formula, the ROE for Air Transport Services Group is:

11% = US $ 119 million ÷ US $ 1.1 billion (based on the last twelve months to June 2021).

The “return” is the annual profit. Another way to look at this is that for every dollar in equity, the company was able to make $ 0.11 in profit.

Does the Airline Services Group have a good ROE?

By comparing a company’s ROE with its industry average, we can get a quick measure of its quality. The limitation of this approach is that some companies are very different from others, even within the same industry classification. If you look at the image below, you can see that Air Transport Services Group has a lower than average ROE (15%) in the classification of the logistics industry.

NasdaqGS: ATSG Return on Equity September 29, 2021

Unfortunately, this is not optimal. That being said, a low ROE isn’t always a bad thing, especially if the business has low leverage as it still leaves room for improvement if the business were to take on more debt. A highly leveraged business with a low ROE is a whole different story and a risky investment on our books. You can see the 4 risks we have identified for Air Transport Services Group by visiting our risk dashboard for free on our platform here.

What is the impact of debt on ROE?

Almost all businesses need money to invest in the business, 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 first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt necessary for growth will increase returns, but will have no impact on equity. So, using debt can improve ROE, but with added risk in stormy weather, metaphorically speaking.

Combine the debt of the Air Transport Services group and its 11% return on equity

It should be noted the high use of debt by Air Transport Services Group, which has given it a debt to equity ratio of 1.26. The combination of a rather low ROE and a high recourse to debt is not particularly attractive. Investors should think carefully about how a business will perform if it weren’t able to borrow so easily, as credit markets change over time.

Conclusion

Return on equity is a useful indicator of a company’s ability to generate profits and return them to shareholders. A business that can earn a high return on equity without going into debt can be considered a high quality business. If two companies have roughly the same level of debt to equity and one has a higher ROE, I would generally prefer the one with a higher ROE.

But ROE is only one piece of a bigger puzzle, as high-quality companies often trade at high earnings multiples. It is important to take into account other factors, such as future profit growth and the amount of investment required for the future. So I think it’s worth checking this out free analyst forecast report for the company.

But beware : Air Transport Services Group may not be the best stock to buy. So take a look at this free list of interesting companies with high ROE and low debt.

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.

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