Advertisement
Australia markets closed

  • ALL ORDS

    8,002.80
    -20.10 (-0.25%)
     

  • AUD/USD

    0.6667
    +0.0015 (+0.23%)
     

  • ASX 200

    7,759.60
    -23.40 (-0.30%)
     

  • OIL

    81.39
    +0.49 (+0.61%)
     

  • GOLD

    2,320.20
    +7.00 (+0.30%)
     

  • Bitcoin AUD

    91,269.48
    -886.98 (-0.96%)
     

  • CMC Crypto 200

    1,264.23
    -1.91 (-0.15%)
     

Should You Be Worried About Ford Motor Company's (NYSE:F) 9.3% Return On Equity?

editorial-team@simplywallst.com (Simply Wall St)
·3-min read

Many investors are still learning about the various metrics that can be useful when analysing a stock. This article is for those who would like to learn about Return On Equity (ROE). We'll use ROE to examine Ford Motor Company (NYSE:F), by way of 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 which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Ford Motor

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

ADVERTISEMENT

So, based on the above formula, the ROE for Ford Motor is:

9.3% = US$4.0b ÷ US$43b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.09 in profit.

Does Ford Motor Have A Good Return On Equity?

By comparing a company's ROE with its industry average, we can get a quick measure of how good it is. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. If you look at the image below, you can see Ford Motor has a lower ROE than the average (19%) in the Auto industry classification.

roe
roe

That certainly isn't ideal. Although, we think that a lower ROE could still mean that a company has the opportunity to better its returns with the use of leverage, provided its existing debt levels are low. A company with high debt levels and low ROE is a combination we like to avoid given the risk involved. You can see the 3 risks we have identified for Ford Motor by visiting our risks dashboard for free on our platform here.

The Importance Of Debt To Return On Equity

Virtually all companies need money to invest in the business, to grow profits. That cash can come from retained earnings, issuing new shares (equity), or debt. In the first and second cases, the ROE will reflect this use of cash for investment in the business. In the latter case, the use of debt will improve the returns, but will not change the equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.

Combining Ford Motor's Debt And Its 9.3% Return On Equity

It appears that Ford Motor makes extensive use of debt to improve its returns, because it has an alarmingly high debt to equity ratio of 3.48. We consider it to be a negative sign when a company has a rather low ROE despite a rather high debt to equity.

Summary

Return on equity is one way we can compare its business quality of different companies. In our books, the highest quality companies have high return on equity, despite low debt. All else being equal, a higher ROE is better.

But when a business is high quality, the market often bids it up to a price that reflects this. The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.

If you would prefer check out another company -- one with potentially superior financials -- then do not miss this free list of interesting companies, that have HIGH return on equity and low debt.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com