Why Sterling Construction Company, Inc. (NASDAQ: STRL) looks like a quality company

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<p class = "Canvas-Atom-Canvas-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Some investors are already familiar with financial figures from this This article is intended for anyone who wants to learn more about ROE and what it means. As part of learning-by-doing, we’ll look at the ROI to get a better understanding of Sterling construction companies, Inc. (NASDAQ: STRL). "data-reactid =" 27 "> While some investors are already familiar with key financial figures (top hat), this article is for those who want to learn more about return on equity (ROE) and want to know why this is important The ROE article will be examined to gain a better understanding of Sterling Construction Company, Inc. (NASDAQ: STRL).

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Sterling Construction Company Achieves 14% ROE, based on the past twelve months. Another possibility is that for every $ 1 worth of equity in the company, $ 0.14 could be earned. "Data reactid =" 28 ">Sterling Construction Company Achieves 14% ROE, based on the past twelve months. Another possibility is that for every $ 1 worth of equity in the company, $ 0.14 could be earned.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = " Check out our latest analysis for Sterling Construction Company "data-reactid =" 29 "> Check out our latest analysis for Sterling Construction Company

How do you calculate the ROE?

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "The Formula for ROE is: "data-reactid =" 31 "> The Formula for ROE is:

Return on equity = net income (from continuing operations) ÷ equity

Or for Sterling Construction Company:

14% = $ 25 million ÷ $ 183 million (based on the past twelve months to September 2019)

It is easy to understand how much of the net profit is in this equation, but equity needs further explanation. This is the total amount of money deposited into the company by shareholders plus any retained earnings. You can calculate equity by subtracting the company's total liabilities from total assets.

What does return on equity mean?

<p class = "canvas-atom canvas-text MB (1.0em) MB (0) – SM MB (0.8em) – SM" type = "text" content = "ROE considers the amount that a company earns in relation to the money it kept in business. The "return" is the profit in the past 12 months. That means the higher the ROE, the more profitable the company is. So, everyone else is the same, Investors should want a high return, This means that two companies can be compared with ROE. "Data-reactid =" 37 "> ROE shows how much a company makes in relation to the money it has kept in the company. The return is the profit of the last twelve. That means, the higher the ROE, the more profitable the enterprise. Investors should want a high return, This means that two companies can be compared with ROE.

Does Sterling Construction Company have a good return?

An easy way to determine if a company has a good return on equity is to compare it to the industry average. The limitation of this approach is that some companies also differ significantly from others within the same industry classification. As you can see in the graph below, Sterling Construction Company has a higher ROE than the average (9.8%) in the construction industry.

NasdaqGS: STRL Past Revenue and Net Income, January 3, 2020

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "That is clearly positive. In my book a A high ROE almost always requires a closer look, for example You could check When insiders buy stocks. "data-reactid =" 52 "> That is clearly positive. In my book, a high return on investment almost always requires a closer look. For example You could check when insiders buy stocks.

Why should you consider debt when looking at ROE?

Virtually all companies need money to invest in the business and make profits. The money for investments can come from the previous year's profit (retained earnings), the issue of new shares or the taking out of loans. In the first and second cases, the ROE will reflect this use of cash to invest in the company. In the latter case, the debt required for growth will increase returns, but will not affect equity. Thus, the use of debt can improve ROE, although, metaphorically speaking, there is an additional risk in stormy weather.

Combination of Sterling Construction Company Debt and 14% Return on Equity

While Sterling Construction Company has some debt, with equity only 0.40, we wouldn't say the debt is inflated. The very respectable return on investment combined with only modest debts suggests that the business is in good shape. The conservative use of debt to increase returns is usually a good move for shareholders, although it tends to expose the company to rate hikes.

But it's just a metric

The return on equity is one way to compare the business quality of different companies. A company that can achieve a high return on equity without debt can be considered a high quality company. In general, if two companies have approximately the same leverage and one has a higher return, I would prefer the one with higher return.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "But ROE is only part of a larger puzzle because high quality Companies often trade in high multiples of profit must also consider the rate at which profit is likely to grow in relation to profit growth expectations reflected in the current price data-rich interactive graphics with forecasts for the companyEmagazine.credit-suisse.com/app/art…1007 & lang = DE But the return on investment is only part of a larger puzzle, as high – quality companies often trade with a high earnings multiplier. This must also be taken into account in the current price. You might want to take a look at this data-rich interactive graph with forecasts for the company.

<p class = "Canvas-Atom Canvas-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "If you prefer to check out another company – one with potential superior finances – then don't miss thisfree List of interesting companies with high return on equity and low debt."data-reactid =" 64 "> If you'd rather try another company – one with potentially superior financial data – don't miss thisfree List of interesting companies with high return on equity and low debt.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com, This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading."data-reactid =" 65 ">If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com. This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading.