Ever looked at a JSE company report and thought, “Sure, they sound successful, but are they actually making money or just making noise?” You’re not alone. Plenty of South African retail investors are fluent in frustration when trying to understand whether a business is profitable or just good at faking it for shareholders.
That’s where three sneaky little ratios come in:
ROE, ROA, and Debt-to-Equity.
Yes, they sound like rejected boy band names, but they’re actually powerful tools for working out whether a company is the real deal or just polishing a turd with borrowed money.
Let’s break it down. No jargon. No fluff. Just straight talk, like you’d get from your financially-savvy cousin who owns one too many property syndicates.
ROE: Return on Equity – Is Your Money Pulling Its Weight?
Return on Equity sounds like something your broker says to make you feel better about a bad decision. But in reality, it simply tells you how much profit a company generates using your money.
Think of ROE as the investment version of “bang for your buck”. If you gave the company R100, how many rands of profit did they manage to squeeze out of it?
A 20% ROE? Lekker. That means for every rand invested by shareholders, the company made 20 cents in net profit.
But here’s where it gets dodgy. Companies can juice up their ROE by borrowing money, loads of it. That makes the return look hot on paper, but under the hood, it’s just debt dressing up as performance. It’s like impressing a Tinder date by renting a Porsche for the night; eventually, someone’s going to ask about the balloon payment.
ROA: Return on Assets – Is This Business Actually Efficient, Or Just Busy?
ROA asks a different question: how well is the company using everything it owns to make money?
Where ROE focuses on shareholder money, ROA zooms out and includes all the company’s assets, from the factories and delivery trucks, to that suspiciously expensive head office in Sandton.
It’s the equivalent of checking whether your 5-piece gym set is being used for actual workouts or just collecting washing. A company with a high ROA is squeezing every drop out of its assets. A low ROA? Either they’ve overinvested in unproductive assets, or they’re operating in a sluggish, asset-heavy industry where results take time.
Context is key here. A tech startup might run lean with minimal assets and score a juicy ROA, while a mining company has to spend billions on yellow machines before it sees a single cent.
So don’t compare a retailer and a gold mine on ROA, that’s like judging a boerie roll against a lamb curry. Both delicious, but very different ingredients.
Debt-to-Equity Ratio – Is This Company Thriving or Just Borrowing Bravado?
Now for the spicy one: Debt-to-Equity. This is the financial version of “Are you really rich, or just rich because of the bank’s money?”
This ratio tells you how much debt a company is using to finance its operations compared to its own equity. It’s a litmus test for leverage, and a flashing warning light when things get out of hand.
A Debt-to-Equity ratio of 1 means half-half, the business is funding itself equally with its own money and borrowed cash.
A ratio of 2 or more? That’s like taking out a second bond to buy crypto, it might work, but it’s risky as hell.
Some industries naturally carry more debt, like construction or infrastructure, but if your favourite share is sitting on a mountain of debt and delivering weak returns, they’re not building, they’re bleeding. And guess who’s holding the mop? You, the shareholder.
Putting the Ratios Together: Reading the Room Like a Smart Investor
No single ratio gives you the full picture. But together, ROE, ROA and Debt-to-Equity are like the holy trinity of business health.
Let’s say:
A company has a high ROE
A low ROA
And a sky-high Debt-to-Equity
That’s not genius, that’s leverage doing the heavy lifting. They’re borrowing heavily to make profits look good. You’re not investing in Warren Buffett. You’re backing a financially stylish gambler hoping interest rates don’t spike.
On the flip side, if a business has:
A decent ROE
A healthy ROA
And a conservative Debt-to-Equity ratio
You’re probably looking at a well-run machine that doesn’t need to max out its credit line to perform. Boring? Maybe. Sustainable? Absolutely.
When Should You Actually Care?
Look, these ratios aren’t gospel. A low ROE might not be a problem if the company is reinvesting heavily for future growth. A high D/E ratio isn’t necessarily a red flag if the company is in an industry where borrowing is strategic.
But the trick is to always ask:
Are the returns real, or are they artificially inflated by debt or dodgy accounting acrobatics?
When you use these ratios together and compare them to industry peers, they become your early-warning system. A sort of “bok in the veld” alarm before your hard-earned rands disappear into the corporate version of a black hole.
Your Stokvel Starter Pack of Stock Lingo – Volume 4
Here’s your cheat sheet for spotting financial fakes vs real performers:
ROE – Tells you if the company’s making decent profit from your money.
ROA – Checks whether the company’s assets are actually being used productively.
Debt-to-Equity – Measures how much of the business is funded by loans vs its own capital.
If these ratios are off, don’t wait for the AGM. Walk away. Or better yet, invest in something that won’t give you financial heartburn.
Disclaimer
While my jokes may be smoother than your cousin’s forex side hustle pitch, remember: This is not financial advice. Do your own research, chat to a licensed advisor.