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Many investors are still informed about other metrics that can be useful when analyzing a stock. This article is for those who need to be more informed about return to equity (ROE). We’ll take a look at the ROE to better understand Live Nation Entertainment, Inc. (NYSE:LYV).
ROE or return on equity is a useful tool for assessing how well a company can generate returns on the investment it has earned from its shareholders. In other words, it shows the company’s good luck in turning shareholder investments into profits.
Check out our latest research for Live Nation Entertainment
The formula for ROE is:
Return on Equity = Net Income (from Continuing Operations) ÷ Stockholders’ Equity
So, based on the formula above, Live Nation Entertainment’s ROE is:
44% = $749 million ÷ $1. 7 billion (based on the last twelve months through September 2023).
The ‘return’ is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders’ equity, the company generated $0.44 in profit.
By comparing a company’s ROE with its industry average, we can get a quick measure of how good it is. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. Pleasingly, Live Nation Entertainment has a superior ROE than the average (13%) in the Entertainment industry.
That’s what we like to see. That said, a maximum ROE does not equate to a maximum return. In addition to adjustments to net income, a maximum ROE may also be the result of maximum leverage relative to equity, indicating risk.
Companies usually need to invest money to grow their profits. That cash can come from retained earnings, issuing new shares (equity), or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt required for growth will boost returns, but will not impact the shareholders’ equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.
As it turns out, Live Nation Entertainment relies heavily on debt for its returns, as its debt-to-equity ratio is alarmingly 3. 88. While its ROE is certainly quite impressive, it can give a false impression about the company’s returns given that its massive debt could simply increase returns.
Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. In our books, the highest quality companies have high return on equity, despite low debt. If two companies have around the same level of debt to equity, and one has a higher ROE, I’d generally prefer the one with higher ROE.
But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. It is important to consider other factors, such as future profit growth — and how much investment is required going forward. So I think it may be worth checking this free report on analyst forecasts for the company.
If you want to see any other company, one with potentially impressive monetary effects, don’t miss this extensive list of attractive companies, which have a 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.