Home Fashion Brands Should You Be Impressed By Sally Beauty Holdings, Inc.’s (NYSE:SBH) ROE?

Should You Be Impressed By Sally Beauty Holdings, Inc.’s (NYSE:SBH) ROE?

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Should You Be Impressed By Sally Beauty Holdings, Inc.'s (NYSE:SBH) ROE?
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Our own knowledge and skills are the best investments we make. This article will explain how to use Return On Equity to better understand a company. We’ll use learning-by-doing to explore ROE in order to better understand Sally Beauty Holdings, Inc.NYSE:SBH).

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. It is a measure of the company’s ability to turn shareholder investments into profit.

Our latest analysis on Sally Beauty Holdings

How do you calculate Return on Equity?

This formula can be used for calculating the return on equity

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

Based on the above formula the ROE for Sally Beauty Holdings would be:

78% = US$230m ÷ US$296m (Based on the trailing twelve months to June 2022).

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The business’s income over the past year is called the’return. This means that for every $1 invested by its shareholders, the company makes $0.78 profit.

Does Sally Beauty Holdings have a good ROE

We can quickly gauge how good a company is by comparing its ROE to the industry average. However, this approach is not perfect as some companies may be very different from others within the same industry. As can be seen in the image below, Sally Beauty Holdings has an ROE that is higher than the average (32%) Specialty retail.

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roe

We like to see that. However, bear in mind that a high ROE doesn’t necessarily indicate efficient profit generation. Apart from changes in net income and equity, a high ROE could also indicate high debt relative to equity. This indicates risk.

Debt and Equity: The Importance of Debt

To grow their profits, most companies require money. This cash can be obtained from issuing shares, retained earnings or debt. In the first case, the ROE will show the growth of capital. In the second case, the growth debt will increase returns but not affect shareholders’ equity. This will make ROE look better than if no loans were used.

Sally Beauty Holdings Debt and Its 78% ROE

Sally Beauty Holdings has a high debt-to-equity ratio of 3.66, which suggests that it uses a lot of debt to fund its business. Although its ROE is quite high, it appears that the company has increased its debt use.

Summary

We can use return on equity to assess the business quality of different businesses. We find that companies with the highest quality have high returns on equity, even though they have low debt. If two companies have the same level of debt, but one has a higher return on equity, I would generally prefer the one that has higher ROE.

However, ROE is an indicator of business quality. You’ll need to consider a variety of factors when determining the right price to purchase a stock. It is important to compare profit growth rates with the expectations reflected by the stock’s price. You might also want to see this FREE report. Visualization of analyst forecasts for the company.

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This is the place to go if you want to check out a different company with better financials. FreeHere is a list of companies that have a high return on equity and low level of debt.

Let us know what you think about this article. Are you concerned about the content? Get in touchContact us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St has a general nature. We provide commentary based only on historical data, analyst forecasts, and are not intended as financial advice.It does not make a recommendation to buy, sell, or trade any stock. It also does not take into account your objectives or financial situation. We strive to provide you with long-term, focused analysis based on fundamental data. Please note that our analysis may not include the most recent announcements from price-sensitive companies or qualitative material. Simply Wall St holds no position in any of these stocks.

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