With a return on equity of 0.8%, is Cushman & Wakefield plc (NYSE:CWK) a quality act?

While some investors are already familiar with 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 will use ROE to examine Cushman & Wakefield plc (NYSE:CWK) through a worked example.

Return on equity, or ROE, is a key measure used to assess how efficiently a company’s management is using the company’s capital. In short, ROE shows the return that each dollar generates relative to its shareholders’ investments.

See our latest analysis for Cushman & Wakefield

How is ROE calculated?

The formula for ROE It is:

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

So, based on the formula above, the ROE for Cushman & Wakefield is:

0.8% = $12 million ÷ $1.6 billion (Based on trailing twelve months to March 2024).

“Return” is the amount earned after tax in the last twelve months. One way to conceptualize this is that for every dollar of shareholder equity that the company has, the company has made $0.01 in profit.

Does Cushman & Wakefield have a good ROE?

By comparing a company’s ROI to the 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 shown in the chart below, Cushman & Wakefield has a lower than average ROE (5.6%) in the real estate industry classification.

That’s not what we like to see. However, a low ROE is not always bad. If the company’s debt level is moderate to low, then there is still a chance that returns can be improved through the use of financial leverage. When a company has a low ROE but a high level of debt, we would be cautious because the risk involved is too high. You can see the 4 risks we identified for Cushman & Wakefield by visiting risk dashboard for free on our platform here.

The importance of debt to return on equity

Most companies need money — from somewhere — to increase their profits. Cash for investment can come from the previous year’s profits (retained earnings), issuing new shares or borrowing. In the first two cases, ROE will capture this use of capital to grow. In the latter case, the debt required for growth will increase returns but not affect equity. This will make the ROE look better than if no debt was used.

Combining Cushman and Wakefield’s debt and its 0.8% return on equity

Cushman & Wakefield’s high use of debt is noteworthy, resulting in a debt-to-equity ratio of 1.94. ROE is quite low, even with the use of significant debt; not a good result in our opinion. Investors should think carefully about how a company might perform if it couldn’t borrow so easily, as credit markets change over time.

The story continues

summary

Return on equity is useful for comparing the quality of different businesses. A company that can achieve a high return on equity without debt could be considered a high-quality business. If two companies have roughly the same level of debt to equity and one has a higher ROE, I would generally prefer the one with the higher ROE.

But ROE is only one piece of a larger puzzle, as high-quality companies often trade at high multiples of earnings. It is important to consider other factors such as future profit growth – and how much investment is required in the future. So you might want to check out this FREE view of analyst forecasts for the company.

But remember: Cushman & Wakefield may not be the best stock to buy. So take a look at it free of charge list of interesting companies with high ROE and low debt.

Have feedback on this article? Worried about content? Get in touch directly with us. Alternatively, email the editorial team at (at) simplywallst.com.

This article from Simply Wall St is general in nature. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology, and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. We aim to provide you with focused long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality materials. Simply Wall St has no position in any of the stocks mentioned.