Advertisement
Canada markets open in 5 hours 16 minutes
  • S&P/TSX

    21,837.18
    -12.02 (-0.06%)
     
  • S&P 500

    5,149.42
    +32.33 (+0.63%)
     
  • DOW

    38,790.43
    +75.63 (+0.20%)
     
  • CAD/USD

    0.7369
    -0.0020 (-0.26%)
     
  • CRUDE OIL

    82.54
    -0.18 (-0.22%)
     
  • Bitcoin CAD

    87,520.30
    -4,714.27 (-5.11%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • GOLD FUTURES

    2,158.90
    -5.40 (-0.25%)
     
  • RUSSELL 2000

    2,024.74
    -14.58 (-0.72%)
     
  • 10-Yr Bond

    4.3400
    0.0000 (0.00%)
     
  • NASDAQ futures

    18,194.00
    -37.50 (-0.21%)
     
  • VOLATILITY

    14.53
    +0.20 (+1.40%)
     
  • FTSE

    7,722.55
    0.00 (0.00%)
     
  • NIKKEI 225

    40,003.60
    +263.20 (+0.66%)
     
  • CAD/EUR

    0.6789
    -0.0003 (-0.04%)
     

Quorum Information Technologies Inc. (CVE:QIS) Delivered A Weaker ROE Than Its Industry

One of the best investments we can make is in our own knowledge and skill set. With that in mind, this article will work through how we can use Return On Equity (ROE) to better understand a business. By way of learning-by-doing, we'll look at ROE to gain a better understanding of Quorum Information Technologies Inc. (CVE:QIS).

Over the last twelve months Quorum Information Technologies has recorded a ROE of 0.7%. Another way to think of that is that for every CA$1 worth of equity in the company, it was able to earn CA$0.01.

View our latest analysis for Quorum Information Technologies

How Do You Calculate Return On Equity?

The formula for ROE is:

ADVERTISEMENT

Return on Equity = Net Profit ÷ Shareholders' Equity

Or for Quorum Information Technologies:

0.7% = CA$176k ÷ CA$24m (Based on the trailing twelve months to September 2019.)

Most know that net profit is the total earnings after all expenses, but the concept of shareholders' equity is a little more complicated. It is all earnings retained by the company, plus any capital paid in by shareholders. The easiest way to calculate shareholders' equity is to subtract the company's total liabilities from the total assets.

What Does ROE Signify?

Return on Equity measures a company's profitability against the profit it has kept for the business (plus any capital injections). The 'return' is the yearly profit. That means that the higher the ROE, the more profitable the company is. So, as a general rule, a high ROE is a good thing. That means it can be interesting to compare the ROE of different companies.

Does Quorum Information Technologies Have A Good Return On Equity?

Arguably the easiest way to assess company's ROE is to compare it with the average in its industry. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. If you look at the image below, you can see Quorum Information Technologies has a lower ROE than the average (24%) in the Software industry classification.

TSXV:QIS Past Revenue and Net Income, November 26th 2019
TSXV:QIS Past Revenue and Net Income, November 26th 2019

That's not what we like to see. It is better when the ROE is above industry average, but a low one doesn't necessarily mean the business is overpriced. Still, shareholders might want to check if insiders have been selling.

How Does Debt Impact ROE?

Virtually all companies need money to invest in the business, to grow 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. That will make the ROE look better than if no debt was used.

Quorum Information Technologies's Debt And Its 0.7% ROE

Although Quorum Information Technologies does use debt, its debt to equity ratio of 0.38 is still low. Its ROE is quite low, and the company already has some debt, so surely shareholders are hoping for an improvement. Careful use of debt to boost returns is often very good for shareholders. However, it could reduce the company's ability to take advantage of future opportunities.

In Summary

Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. Companies that can achieve high returns on equity without too much debt are generally of good quality. All else being equal, a higher ROE is better.

Having said that, while ROE is a useful indicator of business quality, you'll have to look at a whole range of factors to determine the right price to buy a stock. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So I think it may be worth checking this free report on analyst forecasts for the company.

But note: Quorum Information Technologies may not be the best stock to buy. So take a peek at this free list of interesting companies with high ROE and low debt.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.