Masonite International Corporation (NYSE: DOOR) has a ROE of 20%

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One of the best investments we can make is in our own knowledge and skills. With that in mind, this article will discuss how we can use Return on Equity (ROE) to better understand a business. As a learning-by-doing, we’ll take a look at the ROE to better understand Masonite International Corporation (NYSE: DOOR).

Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.

How to calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

Thus, based on the above formula, the ROE of Masonite International is:

20% = US $ 152 million US $ 740 million (based on the last twelve months to October 2021).

“Return” refers to a company’s profits over the past year. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.20.

Does Masonite International have a good ROE?

Perhaps the easiest way to assess a company’s ROE is to compare it to the industry average. It is important to note that this measure is far from perfect, as companies differ considerably within a single industry classification. The image below shows that Masonite International has an ROE that is roughly in line with the construction industry average (20%).

NYSE: DOOR Return on Equity December 1, 2021

It’s no wonder, but it’s respectable. While at least the ROE is not lower than that of the industry, it is still worth checking out the role that corporate debt plays, as high levels of debt relative to equity can also make the ROE appear high. If a business is too indebted, it runs a higher risk of defaulting on interest. To know the 2 risks that we have identified for Masonite International visit our risk dashboard for free.

The importance of debt to return on equity

Businesses generally need to invest money to increase their profits. This liquidity can come from retained earnings, the issuance of new shares (equity) or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt used for growth will improve returns, but will not affect total equity. So, using debt can improve ROE, but with added risk in stormy weather, metaphorically speaking.

Combine Masonite International’s debt and its 20% return on equity

Masonite International clearly uses a high amount of debt to increase returns, as it has a debt-to-equity ratio of 1.17. While its ROE is respectable, it should be borne in mind that there is usually a limit on how much debt a business can use. Investors should think carefully about how a business will perform if it weren’t able to borrow so easily, as credit markets change over time.

Summary

Return on equity is useful for comparing the quality of different companies. Firms that can earn high returns on equity without taking on too much debt are generally of good quality. If two companies have the same ROE, I would generally prefer the one with the least amount of debt.

But ROE is only one piece of a bigger puzzle, as high-quality companies often trade at high earnings multiples. Especially important to consider are the growth rates of earnings, relative to expectations reflected in the stock price. So you might want to take a look at this data-rich interactive graph of business forecasts.

Sure Masonite International may not be the best stock to buy. So you might want to see this free collection of other companies with high ROE and low leverage.

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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 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 goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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