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 Jilin Electric Power Co.,Ltd. (SZSE:000875), 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Jilin Electric PowerLtd
How Do You Calculate Return On Equity?
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 Jilin Electric PowerLtd is:
5.3% = CN¥785m ÷ CN¥15b (Based on the trailing twelve months to March 2022).
The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.
Does Jilin Electric PowerLtd Have A Good ROE?
By comparing a company's ROE with its industry average, we can get a quick measure of how good it is. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. You can see in the graphic below that Jilin Electric PowerLtd has an ROE that is fairly close to the average for the Renewable Energy industry (6.1%).
SZSE:000875 Return on Equity July 8th 2022
That isn't amazing, but it is respectable. Even if the ROE is respectable when compared to the industry, its worth checking if the firm's ROE is being aided by high debt levels. If a company takes on too much debt, it is at higher risk of defaulting on interest payments. You can see the 2 risks we have identified for Jilin Electric PowerLtd by visiting our risks dashboard for free on our platform here.
The Importance Of Debt To Return On Equity
Virtually all companies need money to invest in the business, to grow 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.
Jilin Electric PowerLtd's Debt And Its 5.3% ROE
We think Jilin Electric PowerLtd uses a significant amount of debt to maximize its returns, as it has a significantly higher debt to equity ratio of 3.04. The combination of a rather low ROE and high debt to equity is a negative, in our book.
Summary
Return on equity is useful for comparing the quality of different businesses. A company that can achieve a high return on equity without debt could be considered a high quality business. If two companies have the same ROE, then I would generally prefer the one with less debt.
But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. It is important to consider other factors, such as future profit growth -- and how much investment is required going forward. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.
But note: Jilin Electric PowerLtd may not be the best stock to buy. So take a peek at this free list of interesting companies with high ROE 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.
雖然一些投資者已經非常精通財務指標(帽子提示)，但本文面向的是那些想要了解股本回報率(ROE)及其重要性的人。我們將使用淨資產收益率來檢驗吉林電力股份有限公司(SZSE：000875)，作為一個實例。
股本回報率(ROE)是對一家公司增值和管理投資者資金的效率的測試。簡而言之，淨資產收益率顯示了每一美元相對於其股東投資產生的利潤。
查看我們對吉林電力有限公司的最新分析
你如何計算股本回報率？
可使用以下公式計算淨資產收益率：
股本回報率=(持續經營的)淨利潤？股東權益
因此，根據上述公式，吉林電力股份有限公司的淨資產收益率為：
5.3%=7.85億元×150億元(以截至2022年3月的12個月為基礎)。
“回報”指的是一家公司過去一年的收益。這意味着，股東權益每增加1元，公司就會產生0.05元的利潤。
吉林電力股份有限公司的淨資產收益率好嗎？
通過將一家公司的淨資產收益率(ROE)與其行業平均水平進行比較，我們可以快速衡量它有多好。這種方法的侷限性是，一些公司與其他公司有很大的不同，甚至在相同的行業分類中也是如此。你可以在下圖中看到，吉林電力股份有限公司的淨資產收益率相當接近可再生能源行業的平均水平(6.1%)。
深圳證券交易所：000875股本回報率2022年7月8日
這並不令人驚訝，但它是值得尊敬的。即使與行業相比，公司的淨資產收益率還算不錯，但公司的淨資產收益率是否得到了高負債水平的幫助，還是值得一查的。如果一家公司承擔了太多債務，那麼它拖欠利息的風險就會更高。您可以訪問我們為吉林電力股份有限公司確定的兩個風險風險控制面板在我們的平臺上是免費的。
債務對股本回報率的重要性
幾乎所有的公司都需要資金來投資於業務，以增加利潤。投資的現金可以來自上一年的利潤(留存收益)、發行新股或借款。在前兩種情況下，淨資產收益率將抓住這種資本增長的用途。在後一種情況下，用於增長的債務將提高回報，但不會影響總股本。這將使淨資產收益率看起來比不使用債務的情況下更好。
吉林電力的債務及其5.3%的淨資產收益率
我們認為吉林電力有限公司使用了大量的債務來最大化其回報，因為它的債務與股本比率明顯更高，為3.04。在我們的書中，相當低的淨資產收益率和高的債務股本比率的組合是負面的。
摘要
股本回報率在比較不同企業的質量時很有用。一家能夠在沒有債務的情況下實現高股本回報率的公司可以被認為是一家高質量的企業。如果兩家公司的淨資產收益率相同，那麼我通常會傾向於債務較少的那一家。
但淨資產收益率只是一個更大的謎題的一部分，因為高質量企業的市盈率往往很高。重要的是要考慮其他因素，比如未來的利潤增長，以及未來需要多少投資。因此，你可能想看看這張數據豐富的公司預測互動圖表。
但請注意：吉林電力股份有限公司可能不是買入的最佳股票。所以讓我們來看看這個免費高淨資產收益率和低負債的有趣公司名單。
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本文由Simply Wall St.撰寫，具有概括性。我們僅使用不偏不倚的方法提供基於歷史數據和分析師預測的評論，我們的文章並不打算作為財務建議。它不構成買賣任何股票的建議，也沒有考慮你的目標或你的財務狀況。我們的目標是為您帶來由基本面數據驅動的長期重點分析。請注意，我們的分析可能不會將最新的對價格敏感的公司公告或定性材料考慮在內。Simply Wall St.對上述任何一隻股票都沒有持倉。
