WEC Energy Group's Shocking 10% Return On Equity: Is Management Hiding Something?

One of the best investments we can make is in our own knowledge and skill set. With that in mind, this article will work through how we can use Return on Equity (ROE) to better understand a company. By way of learning-by-doing, we'll look at WEC Energy Group, Inc. (NYSE:WEC) and its ROE to get a sense of whether the company is using its equity effectively.

WEC Energy Group has a fairly satisfactory ROE of 10%. This can be a sign that the company is using its equity to generate profits and grow the business.

So, how does the ROE impact the company's ability to create value for shareholders? Theoretically, a high ROE should mean a high return, but the key question is whether the leverage - the amount of debt - is reasonable. Importantly, companies need financial capital to grow, but we also need to consider whether it has too much debt.

WEC Energy Group's debt-to-equity ratio can be used to get a sense of the extent to which a company relies on its suppliers and lenders to fund its activities and if it has a high degree of leverage. A lower debt-to-equity ratio generally implies a lower level of debt financing, but it can also indicate a lower level of potential leverage.

WEC Energy Group is a fairly large company, so most likely the market is pricing that in to the stock, but it is still worth considering whether there are any further opportunities to drive growth through leveraging its balance sheet.

Return on Equity is a useful indicator of capability, but no business is the same as every other. Other factors that could influence the ROE include the level of debt, the tax environment, and the maturity of the business, which is significant given that WEC Energy Group's ROE is quite high, but not in line with its five-year average, which is 11%.

Although it's often best to look for companies with ROE that outperform the average industry, there can be good reasons why a company's ROE is below par. Still, we'd recommend checking if insiders are buying or selling WEC Energy Group shares with an eye on transactions that took place in the last year, to get a better understanding of the investment strategy.