What Do These Ratios Tell Us About Unilever?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

LONDON -- Before I decide whether to buy a company's shares, I always like to look at two core financial ratios -- return on equity and net gearing.

These two ratios provide an indication of how successful a company is at generating profits using shareholders' funds and debt, and they have a strong influence on dividend payments and share price growth.

Today, I'm going to take a look at consumer goods giant and Fool favorite Unilever (LSE: ULVR  ) (NYSE: UL  )  to see how attractive it looks on these two measures.

Return on equity
The return a company generates on its shareholders' funds is known as return on equity, or ROE. ROE can be calculated by dividing a company's annual earnings by its equity (i.e., the difference between its total assets and its total liabilities) and is expressed as a percentage.

Let's start with a look at Unilever's ROE over the last five years:

Unilever 2008 2009 2010 2011 2012 Average
ROE 45% 30.6% 32% 29.6% 30.4% 33.5%

Unilever's five-year average ROE of 33.5% is impressive, but to see how competitive it really is, we need to compare it to some of its peers, which I'll do in a moment.

What about debt?
One weakness of ROE is that it doesn't show how much debt a company is using to boost its returns. A good way of assessing a company's debt levels is by looking at its net gearing -- the ratio of net debt to equity.

In the table below, I've listed Unilever's net gearing and ROE alongside those of its main U.K. rival, Reckitt Benckiser:

Company Net Gearing 5-Year
Average ROE
Unilever 48.5% 33.5%
Reckitt Benckiser 40.2% 35.3%

Unilever's products are mostly staple goods that we will always buy, regardless of economic conditions. This provides Unilever with pricing power, which is also helped by customers' loyalty to the firm's brands.

I think that Reckitt's growth may be harder to sustain, as it is dependent on high margins and a move into health care, which could expose it to tough new competition.

Unilever's focus on food and personal hygiene products, and its strong emerging market growth, look much more attractive to me.

Is Unilever a buy?
Trading on a P/E of 20, Unilever's shares are not cheap at the moment, but they do provide access to a high-quality income stream.

This year's rising market has pushed Unilever's dividend yield down to the FTSE 100 average, and at the firm's current share price, I'd hold. However, if the market's recent losses continue, and Unilever's shares drop below 2,500 pence, I'd rate them a buy.

Finding market-beating returns
Unilever is one of five shares that the Fool's expert team of analysts have selected for their latest special report, "5 Shares to Retire On."

The other four shares are equally impressive, and I'd strongly recommend you take a look. I own three of the shares featured in this free report, and I don't mind admitting they are among the most successful investments I've ever made.

To find out the identity of the other four companies, click here to download your copy of this free report now, while it's still available.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2478758, ~/Articles/ArticleHandler.aspx, 10/24/2016 4:15:15 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,224.09 78.38 0.43%
S&P 500 2,151.33 10.17 0.47%
NASD 5,309.52 52.12 0.99%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/24/2016 3:59 PM
UL $42.44 Down -0.10 -0.24%
Unilever CAPS Rating: *****
ULVR $3492.42 Up +5.92 +0.17%
Unilever CAPS Rating: No stars