# Ratio Energies – Limited Partnership (TLV:RATI) has an ROE of 17%

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. We will use ROE to examine Ratio Energies – Limited Partnership (TLV:RATI), as a concrete example.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Check out our latest analysis for Ratio Energies – Limited Partnership

### How do you calculate return on equity?

the ROE formula East:

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

Thus, based on the formula above, the ROE for Ratio Energies – Limited Partnership is:

17% = \$40 million ÷ \$236 million (based on trailing 12 months to September 2021).

The “return” is the annual profit. This therefore means that for every ₪1 of its shareholder’s investment, the company generates a profit of 0.17 ₪.

### Does Ratio Energies – Limited Partnership have a good ROE?

Perhaps the easiest way to assess a company’s ROE is to compare it to the industry average. However, this method is only useful as a rough check, as companies differ quite a bit within the same industry classification. The image below shows that Ratio Energies – Limited Partnership has an ROE that is roughly in line with the oil and gas industry average (16%).

So, although the ROE is not exceptional, it is at least acceptable. Even if the ROE is respectable compared to the industry, it is worth checking whether the company’s ROE is helped by high debt levels. If true, this is more an indication of risk than potential. Our risk dashboard must contain the 2 risks that we have identified for Ratio Energies – Limited Partnership.

### The Importance of Debt to Return on Equity

Virtually all businesses need money to invest in the business, to increase their profits. This money can come from retained earnings, issuing new stock (shares), or debt. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, debt used for growth will enhance returns, but will not affect total equity. This will make the ROE better than if no debt was used.

### Energies ratio – The debt of the limited partnership and its ROE of 17%

It seems that Ratio Energies – Limited Partnership uses debt extensively to enhance its returns, as it has an alarming debt-to-equity ratio of 3.49. His ROE is decent, but once I consider all the debt, I’m not really impressed.

### Conclusion

Return on equity is a way to compare the business quality of different companies. In our books, the highest quality companies have a high return on equity, despite low leverage. If two companies have the same ROE, I would generally prefer the one with less debt.

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. You might want to take a look at this data-rich interactive chart of the company’s forecast.

Sure Ratio Energies – Limited Partnership 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.

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.