Boasting a return on equity of 27%, is Ball Corporation (NYSE: BALL) a superior stock?

One of the best investments we can make is in our own knowledge and skills. With that in mind, this article will explain how we can use return on equity (ROE) to better understand a business. Learning by doing, we’ll look at ROE to better understand Ball Corporation (NYSE: BALL).

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest analysis for Ball

How do you calculate return on equity?

ROE can be calculated using the formula:

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

So, based on the formula above, the ROE for Ball is:

27% = $973 million ÷ $3.5 billion (based on trailing 12 months to September 2022).

“Yield” is the income the business has earned over the past year. So, this means that for every $1 of investment by its shareholder, the company generates a profit of $0.27.

Does Ball have a good return on equity?

A simple way to determine if a company has a good return on equity is to compare it to the average for its industry. The limitation of this approach is that some companies are very different from others, even within the same industrial classification. As you can see in the graph below, Ball has an above average ROE (23%) in the packaging industry.

NYSE:BALL Return on Equity November 5, 2022

This is clearly a positive point. Keep in mind that a high ROE does not always mean superior financial performance. A higher proportion of debt in a company’s capital structure can also result in a high ROE, where high debt levels could be a huge risk. Our risk dashboardshould present the 2 risks that we have identified for Ball.

Why You Should Consider Debt When Looking at ROE

Companies generally need to invest money to increase their profits. This money can come from retained earnings, issuing new stock (shares), or debt. In the first and second case, the ROE will reflect this use of cash for investment in the business. In the latter case, the use of debt will improve returns, but will not change equity. So using debt can improve ROE, but with the added risk of stormy weather, metaphorically speaking.

Combine Ball’s debt and his 27% return on equity

Ball uses a high amount of debt to increase returns. Its debt to equity ratio is 2.56. Its ROE is quite impressive, but it probably would have been lower without the use of debt. Investors need to think carefully about how a company would perform if it weren’t able to borrow so easily, as credit markets change over time.

Conclusion

Return on equity is a useful indicator of a company’s ability to generate profits and return them to shareholders. A company that can earn a high return on equity without going into debt could be considered a high quality company. All things being equal, a higher ROE is better.

But ROE is only one piece of a larger puzzle, as high-quality companies often trade on high earnings multiples. It is important to consider other factors, such as future earnings growth and the amount of investment needed in the future. So you might want to check this out for FREE visualization of analyst forecasts for the business.

Sure Ball may not be the best stock to buy. So you might want to see this free collection of other companies that have high ROE and low debt.

Valuation is complex, but we help make it simple.

Find out if Ball is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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