Many investors are still learning about the different metrics that can be useful when analyzing a stock. This article is for those who want to know more about Return On Equity (ROE). We will use ROE to rate Topicus.com Inc. (CVE:TOI), as a worked example.
ROE or return on equity is a useful tool for assessing how effectively a company can generate returns on the investment it has received from its shareholders. In short, ROE shows the profit each dollar generates in relation to its shareholder investments.
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Return on equity can be calculated using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
Based on the above formula, the ROE for Topicus.com is:
6.7% = €47 million ÷ €698 million (based on the last twelve months to September 2025).
The ‘return’ is the annual profit. One way to conceptualize this is that for every CA$1 of shareholder capital it has, the company made CA$0.07 in profit.
Check out our latest analysis for Topicus.com
A simple way to determine whether a company has a good return on equity is to compare it to the average for its industry. Importantly, this is far from a perfect measure, as companies vary significantly within the same industry classification. As evident from the image below, Topicus.com has a lower ROE than the average (12%) in the software industry.
Unfortunately, that is not optimal. However, we think a lower ROE could still mean a company has the opportunity to improve its returns through leverage, provided existing debt is low. A company with high debt and a low return on equity is a combination we like to avoid because of the risks. Our risk dashboard should include the 3 risks we have identified for Topicus.com.
Most companies need money – from somewhere – to grow their profits. That money can come from issuing stock, retained earnings, or debt. In the first and second cases, the ROE will reflect this use of cash for investing in the business. In the latter case, using debt will improve returns but not change equity. Thus, the use of debt can improve return on equity, albeit metaphorically speaking with additional risk in the event of stormy weather.
It’s worth noting that Topicus.com makes heavy use of debt, leading to a debt-to-equity ratio of 1.06. The combination of a fairly low return on equity and significant use of debt is not particularly attractive. Debt increases risk and reduces the options for the business in the future, so you generally want to see a good return from taking on debt.
