Verizon Communications Inc.’s (NYSE:VZ) ROE of 13% Should We Be Delighted?

(CTN News) – Many investors know Verizon’s financial metrics. However, this article is intended for those who wish to learn more about On Equity (ROE) and why it is so critical. Through a learning-by-doing approach, we will examine Verizon Communications Inc. (NYSE:VZ)’s ROE.

An organization’s Return on Equity measures how effectively it is growing its value and managing investors’ funds. Another way of putting it is that it reveals how effective the company is at converting investor capital into profits.

What is the calculation of return on equity?

ROE is calculated as follows:

A return on equity is calculated as follows: Net Profit (from continuing operations) multiplied by shareholders’ equity

As a result, according to the formula above, Verizon Communications’ return on equity is as follows: Based on the trailing twelve months to December 2023, 13% equals US$12 Billion x US$94 Billion.

Profit over the past twelve months is considered the ‘return’. The company earned $0.13 in profit for each $1 of shareholders’ capital it had.

Is Verizon Communications’ return on equity high?

Comparing a company’s return on equity to the average for its industry is an easy way to determine whether it has a high return on equity. Importantly, this is not a perfect measure, since companies within the same industry classification differ significantly.

The image below illustrates Verizon Communications’ better ROE than the industry average (9.2%).

That is what we are looking for. As a result, a high ROE does not necessarily indicate high profitability. In addition, a higher proportion of debt within a company’s capital structure could result in a higher ROE.

However, high debt levels could also represent a significant risk. As part of our risk dashboard, we should include a list of the five risks we have identified for Verizon Communications.

What is the impact of debt on equity return?

The majority of companies require money to invest in their business and increase profits. A company may obtain cash through retained earnings, new shares (equity), or debt. ROE will capture this use of capital to grow in the first two cases.

When debt is used, returns will be improved, but equity will not be altered. By using debt, ROE can be improved, albeit with added risk when faced with stormy weather, metaphorically speaking.

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