According to Daniel Morris at We Financial, Hydro One Limited (TSX: H) is one of the biggest electricity transmission and distribution companies in the country that has an ROE of 9.0%. As one of the largest electricity distributors in the country, many are concerned about the ROE that the company is offering, especially when compared to the rest of the industry.
Not only does studying the ROE of Hydro One improve people’s understanding of the importance of ROE, but it also helps to see if this particular stock is worth investing in. Even though most intermediate and advanced traders know what ROE is, it is still worth looking into it within the context of Hydro One.
Hydro One’s Stable Yet Lackluster ROE
An asset’s ROE is possibly one of the most important factors that any investor should check. It stands for Return on Equity and directly measures how well a company is reinvesting their capital. Therefore, it is the most accurate measure of a company’s profitability with regard to its equity capital.
According to We Financial senior account manager Daniel Morris, Hydro One makes for such a good example because it has a questionable track record, and its stock price is slightly overvalued. With these two major factors in mind, it is worth looking into how its ROE changes and if it makes for a good investment in the long or short term.
To calculate the ROE of a company, you need to find out the company’s net profit and divide that by the shareholder’s equity. Since the company reported a profit of CA$ 1b and did so over 11 months, the shareholder’s equity is equal to CA$ 11b. By dividing the net profit by the shareholder’s equity, (CA$ 1b / CA$ 11b), the return is CA$ 0.09 or 9.0%.
The return means that for every CA$ 1 of equity, the company was able to generate a total of CA$ 0.09.
How Does It Fair to the Rest of the Industry
It is important to understand that calculating the ROE of a stock is not the most concrete way to check if it is profitable. It is simply a rough estimate, and you will still have to perform a number of other checks to see if it is a good investment.
According to Daniel Morris at We Financial, the ROE of Hydro One compared to the rest of the market is not as bad. However, a concerning factor that is worth looking into is its total reliance on debt for boosting returns. So with a higher dependence on debt and a lower ROE, there is not a lot to get excited about for this particular company. While its debts can make for a much healthier ROE, it does make the company more susceptible to more dangerous situations in the market.
To conclude, We Financial senior account manager Daniel Morris believes that Hydro One does not make for a good investment. Along with having an average ROE, the company also relies on debts to boost its returns, which makes it less likely to recommend.