Is DRAGO entertainment Spólka Akcyjna’s (WSE:DGE) ROE Of 34% Impressive?

Many investors are still learning about the various metrics that can be useful when analyzing stocks. This article is for those who want to learn about return on equity (ROE). We will use the ROE to purchase DRAGO Entertainment Spolka Oxygen (WSE:DGE), as a worked example.

Return on equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital provided by the company’s shareholders.

Check out our latest analysis for DRAGO Entertainment Spolka Akcyjna

How do you calculate return on equity?

of the Equity Return Formula is:

Return on equity = Net profit (from continuing operations) ÷ Shareholders’ equity

So, based on the formula above, the ROE for DRAGO Entertainment Spolka Akcyjna is:

34% = zł3.3m ÷ zł9.7m (based on twelve months to September 2022).

‘Return’ is the amount earned after tax in the last twelve months. Another way to think about it is that for every PLN1 worth of equity, the company was able to earn PLN0.34 in profit.

Does DRAGO Entertainment Spolka Akcyjna have a good ROE?

In fact, the easiest way to evaluate a company’s ROE is to compare it to the industry average. However, this method is only useful as a rough check, as companies in the same industry rank quite differently. As you can see in the graphic below, DRAGO Entertainment Spólka Akcyjna has a higher ROE than average (20%). Entertainment industry.

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roe
WSE:DGE Return on Equity on 26th January 2023

This is what we see. With that said, a higher ROE does not always indicate higher profitability. In addition to changes in net income, a higher ROE can result in higher debt than equity, which represents risk. You can see the 4 risks we have identified for DRAGO Entertainment Spolka Akcyjna by visiting our Risk Dashboard for free on our platform here.

How does debt affect return on equity?

Companies usually need to invest money to grow their profits. This cash can come from retained earnings, new shares (equity), or debt issuance. In the case of the first and second options, ROE will reflect the use of cash for growth. In the latter case, the debt required for growth will increase returns, but will not affect shareholders’ equity. This would look better than the ROE if the debt was not used.

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DRAGO Entertainment​​​​​​​Spolka Akcyjna debt and combining it with a 34% return

Shareholders will note that DRAGO Entertainment Spolka Akcyjna does not have a fraction of net debt! Its impressive ROE suggests it’s a high-quality business, but it’s too good to get by without leverage. However, with cash on the balance sheet, a company has a lot more discretion in good times and bad.

Summary

Equity returns are useful for comparing the quality of different businesses. Companies that can earn a high return on equity without much debt are generally of good quality. 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 the higher ROE.

Having said that, while ROE is a useful indicator of the quality of a business, you should look at a whole range of factors to determine the right price to buy a stock. The rate at which profit growth is likely, compared to the expected profit growth reflected in the current price, should also be considered. So I think it might be worth checking it out free of charge this Detailed graph Past earnings, revenue and cash flow.

If you prefer to look at another company – one with possibly better finances – then don’t miss it free of charge List of interesting companies, with high return on equity and low debt.

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Evaluation is complicated, but we help make it simple.

Find out if Drago Entertainment Spolka Akcyjna Potentially over or undervalued by looking at our comprehensive analysis, which includes Fair value estimates, risks and caveats, dividends, internal transactions and financial health.

Check out the free analysis

This article by Simple Wall Saint 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 recommend buying or selling any stocks, and does not take into account your goals, or your financial situation. We aim to bring you long-term focus analysis driven by fundamental data. Note that our analysis may not factor in recent price-sensitive company advertising or quality materials. Simply put, Wall St. has no position in the stock mentioned.

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