Does Unitil Corporation (NYSE:UTL) create shareholder value?
Many investors are still learning the different metrics that can be useful when analyzing a stock. This article is for those who want to know more about return on equity (ROE). Learning by doing, we will examine ROE to better understand Unitil Corporation (NYSE: UTL).
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simpler terms, it measures a company’s profitability relative to equity.
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Unitil is:
8.8% = $41 million ÷ $464 million (based on trailing 12 months to June 2022).
The “yield” is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.09.
Does Unitil 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 significantly within the same industry classification. The image below shows that Unitil has an ROE that is roughly in line with the integrated utilities industry average (8.9%).
It’s not surprising, but it’s respectable. Even if the ROE is respectable compared to the industry, it is worth checking whether the company’s ROE is helped by high debt levels. If so, this increases its exposure to financial risk. You can see the 2 risks we have identified for Unitil by visiting our risk dashboard for free on our platform here.
What is the impact of debt on ROE?
Most businesses need money – from somewhere – 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 first and second case, the ROE will reflect this use of cash for investment in the business. In the latter case, the debt necessary for growth will boost returns, but will not impact equity. Thus, the use of debt can improve ROE, but with an additional risk in the event of a storm, metaphorically speaking.
Unitil’s debt and its ROE of 8.8%
Unitil uses a high amount of debt to increase returns. Its debt to equity ratio is 1.18. The combination of a rather low ROE and heavy reliance on debt is not particularly attractive. Debt brings additional risk, so it’s only really worth it when a business is generating decent returns.
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. All things being equal, a higher ROE is better.
That said, while ROE is a useful indicator of a company’s quality, you’ll need to consider a whole host of factors to determine the right price to buy a stock. Earnings growth rates, relative to expectations reflected in the share price, are particularly important to consider. So I think it’s worth checking it out free analyst forecast report for the company.
Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies.
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