While some investors are already well versed in financial metrics (hat tip), this article is for those who would like to learn about Return On Equity (ROE) and why it is important. We’ll use ROE to examine Health In Tech, Inc. (NASDAQ:HIT), by way of a worked example.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
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The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Health In Tech is:
7.5% = US$1.1m ÷ US$14m (Based on the trailing twelve months to March 2025).
The ‘return’ is the yearly profit. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.08.
Check out our latest analysis for Health In Tech
By comparing a company’s ROE with its industry average, we can get a quick measure of how good it is. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. As is clear from the image below, Health In Tech has a lower ROE than the average (13%) in the Insurance industry.
That certainly isn’t ideal. However, a low ROE is not always bad. If the company’s debt levels are moderate to low, then there’s still a chance that returns can be improved via the use of financial leverage. A company with high debt levels and low ROE is a combination we like to avoid given the risk involved. Our risks dashboard should have the 2 risks we have identified for Health In Tech.
Companies usually need to invest money to grow their profits. That cash can come from retained earnings, issuing new shares (equity), or debt. In the first and second cases, the ROE will reflect this use of cash for investment in the business. In the latter case, the debt used for growth will improve returns, but won’t affect the total equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.
Shareholders will be pleased to learn that Health In Tech has not one iota of net debt! So although its ROE isn’t that impressive, we shouldn’t judge it harshly on that metric, because it didn’t use debt. After all, with cash on the balance sheet, a company has a lot more optionality in good times and bad.
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