Is the 26% ROE of Truecaller AB (publ) (STO: TRUE B) strong compared to its sector?
One of the best investments we can make is in our own knowledge and skills. With that in mind, this article will explain how we can use return on equity (ROE) to better understand a business. Learning by doing, we will look at ROE to better understand Truecaller AB (publ) (STO:TRUE B).
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest analysis for Truecaller
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Truecaller is:
26% = 447 million kr ÷ 1.7 billion kr (based on the last twelve months until June 2022).
The “yield” is the profit of the last twelve months. Another way to think about this is that for every 1 SEK worth of equity, the company was able to make a profit of 0.26 SEK.
Does Truecaller have a good ROE?
A simple way to determine if a company has a good return on equity is to compare it to the average for its industry. It is important to note that this measure is far from perfect, as companies differ significantly within the same industry classification. If you look at the image below, you can see that Truecaller has an ROE similar to the software industry classification average (22%).
It’s not surprising, but it’s respectable. Although at least the ROE is not lower than the industry, it is always worth checking the role that the company’s debt plays, since high levels of debt relative to equity can also give the impression that the ROE is high. If so, this increases its exposure to financial risk. To know the 2 risks we have identified for Truecaller, visit our risk dashboard for free.
Why You Should Consider Debt When Looking at ROE
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 first and second case, the ROE will reflect this use of cash for investment in the business. In the latter case, debt used for growth will enhance returns, but will not affect total equity. So using debt can improve ROE, but with the added risk of stormy weather, metaphorically speaking.
Combine Truecaller’s debt and its 26% return on equity
Shareholders will be delighted to learn that Truecaller does not have an iota of net debt! Its impressive ROE suggests it’s a high-quality company, but it’s even better to have achieved this without leverage. Ultimately, when a company has zero debt, it is better positioned to seize future growth opportunities.
Return on equity is a way to compare the business 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 ROE is only one piece of a larger puzzle, as high-quality companies often trade on high earnings multiples. 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.
If you’d rather check out another company – one with potentially superior finances – then don’t miss this free list of attractive companies, which have a high return on equity and low debt.
Valuation is complex, but we help make it simple.
Find out if Truecaller is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
See the free analysis
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. 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.