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any investors are still learning about key metrics for stock analysis, and Return On Equity (ROE) is one of them. This article will explore ROE using Fundamenta Real Estate AG (VTX:FREN) as a practical example.

    ROE measures how effectively a company grows its value and manages shareholders' money. It's a profitability ratio that calculates the rate of return on capital provided by shareholders. To calculate ROE, use the formula: Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity.

    For Fundamenta Real Estate, the ROE is 3.1% based on the trailing twelve months to June 2024. This means for every CHF1 of shareholders' capital, the company made CHF0.03 in profit after tax.

    Comparing ROE with industry averages can be a useful check, but it's essential to consider individual company differences. Fundamenta Real Estate's ROE is roughly in line with the Real Estate industry average (3.9%). However, this doesn't necessarily indicate good performance, as high debt levels can artificially boost ROE.

    High debt levels can increase risk and reduce future options for a company. In Fundamenta Real Estate's case, its debt to equity ratio of 1.39 suggests significant borrowing. Despite using debt, the company's ROE remains low, which is not a good result in our opinion.

    ROE is just one aspect of evaluating business quality. A high-quality business should achieve a high return on equity without relying heavily on debt. When comparing companies with similar ROE, we generally prefer those with lower debt levels. However, it's essential to consider other factors, such as future profit growth and required investment.