Investing in knowledge and skills is one of the best investments one can make. To better understand a business, Return On Equity (ROE) is a useful tool. ROE assesses how effectively a company generates returns on shareholder investments, revealing its success at turning investments into profits. The formula for ROE is: Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity.
Using Titan Company Limited (NSE:TITAN) as a worked example, the ROE for Titan is 32% = ₹37b ÷ ₹116b (based on the trailing twelve months to June 2025). This means that for every ₹1 of shareholder investments, the company generates a profit of ₹0.32. To assess if Titan has a good ROE, it is compared to the average in its industry, which is 8.2% in the Luxury industry. Titan’s ROE is higher, which is a good sign.
However, a high ROE doesn’t necessarily indicate efficient profit generation, as a higher proportion of debt in a company’s capital structure may also result in a high ROE. Titan’s debt to equity ratio is 1.79, which is a high use of debt. While its ROE is impressive, it would be more impressive if the company achieved this with lower debt. Investors should think carefully about how a company might perform if it was unable to borrow so easily.
Return on equity is one way to compare the business quality of different companies. High-quality companies have high return on equity, despite low debt. If two companies have the same ROE, the one with less debt is generally preferred. However, ROE is just one piece of a bigger puzzle, and other factors such as future profit growth and investment required should also be considered.
In conclusion, Return On Equity is a useful tool to assess a company’s ability to generate returns on shareholder investments. While Titan’s ROE is impressive, its high use of debt is a concern. Investors should consider multiple factors, including debt, future profit growth, and investment required, when evaluating a company’s business quality. It is also important to note that the article is general in nature and does not constitute financial advice, and investors should consider their own objectives and financial situation before making any investment decisions.