With A Return On Equity Of 11%, Has Methanex Corporation’s (TSE:MX) Management Done Well?
3 min read
In This Article:
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. To keep the lesson grounded in practicality, we’ll use ROE to better understand Methanex Corporation (TSE:MX).
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Methanex is:
11% = US$335m ÷ US$2.9b (Based on the trailing twelve months to June 2025).
The ‘return’ is the amount earned after tax over the last twelve months. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.11 in profit.
See our latest analysis for Methanex
By comparing a company’s ROE with its industry average, we can get a quick measure of how good it is. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. If you look at the image below, you can see Methanex has a similar ROE to the average in the Chemicals industry classification (13%).
That’s neither particularly good, nor bad. While at least the ROE is not lower than the industry, its still worth checking what role the company’s debt plays as high debt levels relative to equity may also make the ROE appear high. If true, then it is more an indication of risk than the potential. You can see the 2 risks we have identified for Methanex by visiting our risks dashboard for free on our platform here.
Virtually all companies need money to invest in the business, to grow profits. That cash can come from retained earnings, issuing new shares (equity), or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt used for growth will improve returns, but won’t affect the total equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.
Methanex clearly uses a high amount of debt to boost returns, as it has a debt to equity ratio of 1.01. 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.
