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One of the most productive investments we can make is in our own wisdom and skills. With that in mind, this article explains how to use return on equity (ROE) to better perceive a business. To keep the lesson based on practicality, we will use ROE to better perceive CNO Financial Group, Inc. (NYSE: CNO).
Return on equity, or ROE, is proof of how well a company increases its price and manages investors’ money. In terms, it measures a company’s profitability relative to capital.
Read our latest research for CNO Financial Group
The formula for return on equity is:
Return on Equity = Net Income (from Continuing Operations) ÷ Stockholders’ Equity
Thus, according to the previous formula, the ROE of CNO Financial Group is:
2.3% = US$44m ÷ US$1.9b (Based on the trailing twelve months to September 2023).
The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.02.
Arguably, the simplest way to assess a company’s ROE is to compare it to the industry average. It should be noted that this measure is far from perfect, as corporations differ particularly within the same industry classification. If you look at the symbol below, you can see that CNO Financial Group has a lower ROE than the average of the insurance industry ranking (14%).
In fact, it’s not ideal. That said, a low ROE is rarely a very bad thing, especially if the company has low debt, as it still leaves room for improvement if the company were to take on more debt. A highly leveraged company with a low ROE is a whole other story and is a menacing investment in our eyes. You can view the 3 threats we know about for CNO Financial Group by visiting our free threat dashboard on our platform here.
Most companies want coins, from somewhere, to increase their profits. These currencies can come from retained earnings, the issuance of new shares (equities) or debt. In the first and second case, the ROE will reflect this use of currencies to invest. the business. In the latter case, the debt necessary for expansion will accumulate, but will not have an effect on capital. In this way, the use of debt will increase the return on investment, even if the company’s economic fundamentals remain the same.
It is worth noting the increased use of leverage by CNO Financial Group, which has resulted in a debt-to-equity ratio of 2. 19. The combination of low ROE and high recourse to debt is not particularly appealing. Investors want to think carefully about how a company would do if it couldn’t borrow so easily, as credit markets change over time.
Return on equity is a useful indicator of a company’s ability to generate profits and return them to shareholders. Companies that can get the best returns on equity without taking on too much debt are of smart quality. All things being equal, a higher ROE is preferable.
That said, while ROE is a useful indicator of a company’s quality, you need to look at a variety of factors to determine the right value to buy a stock. Earnings growth rates, relative to expectations reflected in the percentage value, are a particularly important factor. detail to consider. You might want to see this FREE visualization of analyst forecasts for the business.
But be warned: CNO Financial Group may not be the best stock to buy. Then take a look at this extensive list of attractive companies with high ROE and low debt.
Any comments on this article? Worried about the content?Contact us directly. You can also email the editorial team(at) Simplywallst. com. This article from Simply Wall St is general in nature. We provide observations based on old knowledge and analyst forecasts that employ only unbiased methods and our articles are not intended to constitute monetary advice. It is not advice for buying or selling stocks and does not take into account your purposes or monetary situation. Our purpose is to provide you with specific, long-term research based on basic knowledge. Please note that our research may not take into account the latest announcements from price-sensitive companies or qualitative factors. Simply put, Wall St does not have any position in any of the stocks mentioned.