Teradata Corporation (NYSE:TDC) and Allison Transmission Holdings, Inc. (NYSE:NYSE:ALSN) have both been identified as companies that surpass industry averages in Return on Equity (ROE), a key metric for evaluating a company's effectiveness in generating returns on shareholder investments.
On Monday, it was revealed that Teradata, a provider of database and analytics-related software, services, and products, had an ROE of 27%, significantly higher than the Software industry average of 9.8%. This implies that for every $1 of shareholders' capital Teradata possesses, it generates $0.27 in profit. However, it's noteworthy that Teradata has a high debt-to-equity ratio of 2.28, suggesting the firm's impressive ROE is likely fueled by its substantial use of debt.
Similarly, Allison Transmission Holdings, a manufacturer of fully automatic transmissions for medium- and heavy-duty commercial vehicles and hybrid-propulsion systems for city buses, has also outperformed its industry peers with an ROE of 59%. This is considerably higher than the Machinery industry average of 14%, indicating that Allison Transmission Holdings generates $0.59 in profit for each $1 of shareholders' capital.
However, as with Teradata, investors must consider the potential risks associated with high levels of debt. Both companies' use of debt to finance growth can enhance returns but also introduce additional risk in volatile market conditions.
ROE is calculated by dividing net profit from continuing operations by shareholders' equity. It serves as an important tool for investors to assess how effectively a company manages its money and grows its value. Comparing a company's ROE with its industry average provides a quick measure of its performance, although this is not a perfect measure due to significant differences among companies within the same industry classification.
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