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. We'll use ROE to examine Guangdong No.2 Hydropower Engineering Company, Ltd. (SZSE:002060), by way of a worked example.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Guangdong No.2 Hydropower Engineering Company
How Is ROE Calculated?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Guangdong No.2 Hydropower Engineering Company is:
8.6% = CN¥369m ÷ CN¥4.3b (Based on the trailing twelve months to September 2022).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.09 in profit.
Does Guangdong No.2 Hydropower Engineering Company Have A Good Return On Equity?
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. You can see in the graphic below that Guangdong No.2 Hydropower Engineering Company has an ROE that is fairly close to the average for the Construction industry (7.8%).
SZSE:002060 Return on Equity December 15th 2022
That isn't amazing, but it is respectable. Although the ROE is similar to the industry, we should still perform further checks to see if the company's ROE is being boosted by high debt levels. If so, this increases its exposure to financial risk. Our risks dashboardshould have the 2 risks we have identified for Guangdong No.2 Hydropower Engineering Company.
Why You Should Consider Debt When Looking At ROE
Companies usually need to invest money to grow their profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. 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. That will make the ROE look better than if no debt was used.
Guangdong No.2 Hydropower Engineering Company's Debt And Its 8.6% ROE
It appears that Guangdong No.2 Hydropower Engineering Company makes extensive use of debt to improve its returns, because it has an alarmingly high debt to equity ratio of 4.35. The combination of a rather low ROE and high debt to equity is a negative, in our book.
Conclusion
Return on equity is useful for comparing the quality of different businesses. In our books, the highest quality companies have high return on equity, despite low debt. If two companies have around the same level of debt to equity, and one has a higher ROE, I'd generally prefer the one with higher ROE.
But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. So you might want to check this FREE visualization of analyst forecasts for the company.
If you would prefer check out another company -- one with potentially superior financials -- then do not miss this free list of interesting companies, that have HIGH return on equity and low debt.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
虽然一些投资者已经非常精通财务指标(帽子提示)，但本文面向的是那些想要了解股本回报率(ROE)及其重要性的人。我们将用净资产收益率对广东第二水电工程股份有限公司(深圳证券交易所：002060)进行实证分析。
股本回报率(ROE)是对一家公司增值和管理投资者资金的效率的测试。换句话说，它揭示了该公司成功地将股东投资转化为利润。
查看我们对广东第二水电工程公司的最新分析
净资产收益率是如何计算的？
可使用以下公式计算净资产收益率：
股本回报率=(持续经营的)净利润？股东权益
因此，根据上述公式，广东第二水电工程公司的净资产收益率为：
8.6%=3.69亿元×43亿元(以截至2022年9月的12个月为基础)。
“回报”指的是企业在过去一年中获得的收入。一种概念化的方法是，公司每拥有1元人民币的股东资本，就会获得0.09元人民币的利润。
广东第二水电工程公司的股本回报率好吗？
通过将一家公司的净资产收益率(ROE)与其行业平均水平进行比较，我们可以快速衡量它有多好。重要的是，这远远不是一个完美的衡量标准，因为在同一行业分类中，公司的差异很大。从下图可以看到，广东第二水电工程公司的净资产收益率(ROE)相当接近建筑业的平均水平(7.8%)。
深圳证券交易所：002060股本回报率2022年12月15日
这并不令人惊讶，但它是值得尊敬的。尽管净资产收益率与行业类似，但我们仍应进行进一步检查，看看公司的净资产收益率是否受到高债务水平的提振。如果是这样的话，这将增加其金融风险敞口。我们的风险仪表板应该有我们为广东第二水电工程公司确定的两个风险。
为什么在考虑净资产收益率时应该考虑债务
公司通常需要投入资金来增加利润。投资的现金可以来自上一年的利润(留存收益)、发行新股或借款。在前两种情况下，净资产收益率将抓住这种资本增长的用途。在后一种情况下，用于增长的债务将提高回报，但不会影响总股本。这将使净资产收益率看起来比不使用债务的情况下更好。
广东第二水电工程公司债务及其8.6%的净资产收益率
广东第二水电工程公司似乎大量使用债务来提高回报，因为该公司的债务权益比率高得惊人，高达4.35。在我们的书中，相当低的净资产收益率和高的债务股本比率的组合是负面的。
结论
股本回报率在比较不同企业的质量时很有用。在我们的账目中，最高质量的公司拥有高股本回报率，尽管债务水平较低。如果两家公司的债务权益比大致相同，而其中一家公司的净资产收益率更高，我通常会更喜欢净资产收益率更高的那家公司。
但净资产收益率只是一个更大的谜题的一部分，因为高质量企业的市盈率往往很高。相对于股价反映的预期，利润增长率是一个特别重要的考虑因素。因此，你可能想查看分析师对该公司预测的免费可视化。
如果你更愿意看看另一家公司--一家财务状况可能更好的公司--那么不要错过这一点免费列出了一些有趣的公司，这些公司拥有高股本回报率和低债务。
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本文由Simply Wall St.撰写，具有概括性。我们仅使用不偏不倚的方法提供基于历史数据和分析师预测的评论，我们的文章并不打算作为财务建议。它不构成买卖任何股票的建议，也没有考虑你的目标或你的财务状况。我们的目标是为您带来由基本面数据驱动的长期重点分析。请注意，我们的分析可能不会将最新的对价格敏感的公司公告或定性材料考虑在内。Simply Wall St.对上述任何一只股票都没有持仓。
