Many investors are still learning about the different metrics that can be useful when analyzing a stock. This article is for those who want to know about Return on Equity (ROE). With a learn-by-doing approach, we at Live Nation Entertainment, Inc. Let’s look at the ROE to get a better understanding of (NYSE:LYV).
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investments it receives from its shareholders. In other words, it reflects the company’s success in converting shareholder investments into profits.
See our latest analysis for Live Nation Entertainment
How to calculate return on equity?
formula for roe Is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Live Nation Entertainment is:
44% = US$749m ÷ US$1.7b (based on trailing twelve months to September 2023).
‘Return’ is the amount earned after tax over the last twelve months. This means that for every $1 worth of shareholders’ equity, the company made $0.44 in profit.
Does Live Nation Entertainment have a good ROE?
By comparing a company’s ROE to its industry average, we can get a quick assessment of how good it is. However, this method is only useful as a rough check, as companies vary considerably within the same industry classification. Pleasantly, Live Nation Entertainment’s ROE is better than average (13%) in the Entertainment industry.
That’s what we like to see. That said, a high ROE does not always indicate high profitability. In addition to changes in net income, high ROE can also result in high debt relative to equity, indicating risk.
Why You Should Consider Debt When Looking at ROE
Companies usually need to invest money to increase 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 shareholders’ equity. In this way the use of debt will boost ROE even though the core economics of the business will remain the same.
Live Nation Entertainment’s combination of debt and its 44% return on equity
It appears that Live Nation Entertainment makes extensive use of debt to improve its returns, as it has a worryingly high debt-to-equity ratio of 3.88. While its ROE is undoubtedly quite impressive, it may give a false impression about the company’s returns, as its heavy debt may inflate those returns.
Return on equity is a useful indicator of a business’s ability to generate profits and return them to shareholders. In our books, the highest quality companies have high returns on equity despite low debt. If two companies have similar levels of debt to equity and one has a higher ROE, I would generally prefer the company with the higher ROE.
But ROE is just one piece of a larger puzzle, as high quality businesses often trade at high multiples of earnings. It’s important to consider other factors, such as future profit growth – and how much investment is required going forward. So I think it might be worth checking out Free Report on analyst forecasts for the company.
If you would prefer to check out another company – potentially with a better financial position – then don’t miss this Free List of interesting companies with high return on equity and low debt.
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This article from Simply Wall St is of a general nature. We only provide commentary based on historical data and analyst forecasts using unbiased methodology and our articles are not intended to provide financial advice. It does not recommend buying or selling any stock, and does not take into account your objectives, or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.