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Is Expedia Group, Inc.’s (NASDAQ:EXPE) ROE of 32% better than average?
Many investors are still learning about the various metrics that can be useful when analyzing a stock. This article is for those who would like to learn about Return on Equity (ROE). We will use ROE to examine Expedia Group, Inc. (NASDAQ:EXPE), through a practical example.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio that measures the rate of return on the capital provided by the company’s shareholders.
See our latest analysis for Expedia Group
How to calculate return on equity?
ROE can be calculated using the formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
Therefore, based on the above formula, Expedia Group’s ROE is:
32% = US$692 million ÷ US$2.1 billion (based on the last twelve months to March 2024).
The ‘return’ is the profit over the last twelve months. So this means that for every $1 of its shareholders’ investment, the company generates a profit of $0.32.
Does Expedia Group have a good return on equity?
Probably the easiest way to assess a company’s ROE is to compare it to the average for its industry. It’s important to note that this is far from a perfect measure, because companies differ significantly within the same industry classification. As is clear from the image below, Expedia Group has a better ROE than the average (19%) in the Hospitality industry.
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That’s what we like to see. That said, a high ROE doesn’t always indicate high profitability. A higher proportion of debt in a company’s capital structure can also result in a high ROE, where high debt levels can be a huge risk. Our risk dashboardmust have the 2 risks we identified for Expedia Group.
How does debt affect return on equity?
Most companies need money—from somewhere—to grow their profits. This money can come from retained earnings, issuing new shares (equity), or debt. In the first two cases, ROE will capture this use of capital for growth. In the latter case, using debt will improve returns but will not change equity. This will make ROE look better than if no debt were used.
Combining Expedia Group’s debt and its 32% return on equity
It’s worth noting Expedia Group’s high use of debt, leading to its debt-to-equity ratio of 2.93. There’s no doubt that ROE is impressive, but it’s worth keeping in mind that the metric could have been lower if the company had reduced its debt. Investors should think carefully about how a company might fare if it couldn’t borrow as easily, because credit markets change over time.
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Conclusion
Return on equity is useful for comparing the quality of different businesses. Companies that can achieve high returns on equity without a lot of debt are generally good quality. If two companies have roughly the same level of debt to equity, and one has a higher ROE, I generally prefer the one with the higher ROE.
But ROE is just one piece of a larger puzzle, as high-quality businesses typically trade at high multiples of earnings. It’s important to consider other factors, such as future earnings growth — and how much investment is needed going forward. So you might want to check out this FREE view analysts’ forecasts for the company.
But note: Expedia Group may not be the best stock to buy. So take a look at this free list of interesting companies with high ROE and low debt.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our aim is to bring you long-term focused analysis, driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, send an email editorial-team@simplywallst.com