Is Decarbonization Plus Acquisition Corporation IV’s ( NASDAQ:HHRS ) ROE 16%?

One of the best investments we can make is our own knowledge and skills. With this in mind, in this article we will discuss how we can use return on equity (ROE) to better understand the business. We’ll use ROE to examine Decarbonization Plus Acquisition Corporation IV (NASDAQ:HHRS) as a proven example.

Return on Equity, or ROE, is a test of how effectively a company increases its value and manages investors’ money. In simple terms, it measures a company’s profitability relative to equity.

View our latest analysis for Decarbonization Plus Acquisition Corporation IV

How to calculate return on equity?

Return on equity can be calculated using the formula:

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

Therefore, based on the above formula, the ROE for Decarbonization Plus Acquisition Corporation IV is:

16% = CA$195M ÷ CA$1.2B (Based on the trailing twelve months to September 2022).

“Return” is the income a company has earned over the past year. Another way to think about it is that for every $1 of equity, the company was able to earn $0.16 in profit.

Does Decarbonization Plus Acquisition Corporation IV have a good ROE?

A simple way to determine whether a company is earning a good return on equity is to compare it to the average for its industry. Importantly, this is not a perfect measure, as companies vary significantly within the same industry classification. If you look at the image below, you will see that Decarbonization Plus Acquisition Corporation IV has a lower ROE than the average (31%) in the Oil and Gas industry classification.

Unfortunately, this is suboptimal. That being said, a low ROE isn’t always a bad thing, especially if the company has low financial leverage, as it still leaves room for improvement if the company were to take on more debt. A company with a high level of debt and low ROE is a combination we prefer to avoid due to the risk associated with it.

Why you should consider debt when looking at ROE

Most businesses need money from somewhere to increase their profits. This money may come from issuing shares, retained earnings, or debt. In the first two cases, ROE will capture this use of capital for growth. In the latter case, the debt necessary for growth will increase profits but will have no impact on equity. So using debt can improve ROE, although, metaphorically speaking, it comes with additional risk in the event of stormy weather.

Debt Decarbonization Plus Acquisition Corporation IV and its 16% ROE

Although Decarbonization Plus Acquisition Corporation IV does use debt, its debt-to-equity ratio of 0.15 is still low. A very decent ROE combined with low debt suggests that the company is in good shape. Conservative use of debt to increase profits is usually a good move for shareholders, although it makes the company more vulnerable to interest rate increases.

Application

Return on equity is one way to compare the business quality of different companies. In our books, the highest quality companies are characterized by high return on equity, despite low debt. Assuming everything else is equal, higher ROE is better.

While ROE is a useful indicator of business quality, there are a number of factors to consider to determine the appropriate purchase price for a stock. It is important to consider other factors such as future profit growth and how much investment will be required in the future. That’s why I think it’s worth checking out free This detailed chart past profits, revenues and cash flows.

Of course Decarbonization Plus Acquisition Corporation IV may not be the best stock to buy. So you might want to see this free a collection of other companies that have high ROE and low debt.

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This article by Simply Wall St is of a general nature. We comment based on historical data and analyst forecasts, using only an unbiased methodology, and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide long-term, focused analysis based on fundamental data. Please note that our analysis may not reflect the latest price-sensitive company announcements or qualitative content. Simply Wall St has no position in any of the stocks mentioned.

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