Leave it to Simply Wall St. to delve into the various metrics that can be useful when analyzing a stock.
This time around, the financial newsletter’s experts have peeled back the onion on Gray Television — until Monday poised to become the nation’s largest TV station owner thanks to its pending merger with Raycom Media.
What’s the verdict on Gray’s Return on Equity (ROE)?
Gray Television has a ROE of 26%, based on the last twelve months.
“Another way to think of that is that for every $1 worth of equity in the company, it was able to earn $0.26,” Simply Wall St. notes.
The formula for return on equity is:
Return on Equity = Net Profit ÷ Shareholders’ Equity
Or, for Gray Television:
26% = 288.106 ÷ US $1.1 billion (based on the trailing 12 months to September 2018)
“Most know that net profit is the total earnings after all expenses, but the concept of shareholders’ equity is a little more complicated,” it notes. “It is all earnings retained by the company, plus any capital paid in by shareholders. You can calculate shareholders’ equity by subtracting the company’s total liabilities from its total assets.”
What Does Return On Equity Signify?
ROE measures a company’s profitability against the profit it has kept for the business, plus any capital injections. “The ‘return’ is the profit over the last twelve months,” Simply Wall St. says. “That means that the higher the ROE, the more profitable the company is. So, all else equal, investors should like a high ROE. Clearly, then, one can use ROE to compare different companies.”
But, does Gray have a good ROE?
As you can see in the graphic below, Gray Television has a higher ROE than the average (18%) in the media industry.
“That’s clearly a positive,” Simply Wall St. concludes.
For those concerned about Gray’s debt, here’s how Simply Wall St. addresses it.
“Gray Television does use a significant amount of debt to increase returns,” it notes. “It has a debt to equity ratio of 1.64. While the ROE is impressive, that metric has clearly benefited from the company’s use of debt. Debt increases risk and reduces options for the company in the future, so you generally want to see some good returns from using it.”