Did Crossfor Co.,Ltd. (TSE:7810) Use Debt To Deliver Its ROE Of 4.4%?

Simply Wall St · 04/14 21:16

While some investors are already well versed in financial metrics (hat tip), this article is for those who would like to learn about Return On Equity (ROE) and why it is important. We'll use ROE to examine Crossfor Co.,Ltd. (TSE:7810), by way of a worked example.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

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

4.4% = JP¥80m ÷ JP¥1.8b (Based on the trailing twelve months to January 2025).

The 'return' is the profit over the last twelve months. So, this means that for every ¥1 of its shareholder's investments, the company generates a profit of ¥0.04.

View our latest analysis for CrossforLtd

Does CrossforLtd Have A Good ROE?

Arguably the easiest way to assess company's ROE is to compare it with the average in its industry. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. You can see in the graphic below that CrossforLtd has an ROE that is fairly close to the average for the Luxury industry (5.4%).

roe
TSE:7810 Return on Equity April 14th 2025

That's neither particularly good, nor bad. Even if the ROE is respectable when compared to the industry, its worth checking if the firm's ROE is being aided by high debt levels. If so, this increases its exposure to financial risk. Our risks dashboardshould have the 3 risks we have identified for CrossforLtd.

How Does Debt Impact ROE?

Virtually all companies need money to invest in the business, to grow profits. That cash can come from issuing shares, retained earnings, or debt. In the first and second cases, the ROE will reflect this use of cash for investment in the business. In the latter case, the debt used for growth will improve returns, but won't affect the total equity. That will make the ROE look better than if no debt was used.

CrossforLtd's Debt And Its 4.4% ROE

CrossforLtd clearly uses a high amount of debt to boost returns, as it has a debt to equity ratio of 1.64. Its ROE is quite low, even with the use of significant debt; that's not a good result, in our opinion. Investors should think carefully about how a company might perform if it was unable to borrow so easily, because credit markets do change over time.

Summary

Return on equity is useful for comparing the quality of different businesses. Companies that can achieve high returns on equity without too much debt are generally of good quality. If two companies have the same ROE, then I would generally prefer the one with less debt.

Having said that, while ROE is a useful indicator of business quality, you'll have to look at a whole range of factors to determine the right price to buy a stock. The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. Check the past profit growth by CrossforLtd by looking at this visualization of past earnings, revenue and cash flow.

But note: CrossforLtd may not be the best stock to buy. So take a peek at this free list of interesting companies with high ROE and low debt.