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 business. To keep the lesson grounded in practicality, we'll use ROE to better understand Shanghai Zhongyida Co., Ltd. (SHSE:900906).
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for Shanghai Zhongyida
How Do You Calculate Return On Equity?
Return on equity 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 Shanghai Zhongyida is:
41% = CN¥72m ÷ CN¥175m (Based on the trailing twelve months to June 2022).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.41 in profit.
Does Shanghai Zhongyida 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. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. Pleasingly, Shanghai Zhongyida has a superior ROE than the average (8.1%) in the Machinery industry.
![roe](https://usnewsfile.futunn.com/pic/0-15066761-0-d9622521368fe5f83f6ddd8f88019cbc.png/big)
SHSE:900906 Return on Equity September 27th 2022
That's what we like to see. However, bear in mind that a high ROE doesn't necessarily indicate efficient profit generation. Aside from changes in net income, a high ROE can also be the outcome of high debt relative to equity, which indicates risk.
The Importance Of Debt To Return On Equity
Virtually all companies need money to invest in the business, to grow profits. That cash can come from retained earnings, issuing new shares (equity), or debt. In the first and second cases, the ROE will reflect this use of cash for investment in the business. In the latter case, the debt required for growth will boost returns, but will not impact the shareholders' equity. That will make the ROE look better than if no debt was used.
Combining Shanghai Zhongyida's Debt And Its 41% Return On Equity
It appears that Shanghai Zhongyida makes extensive use of debt to improve its returns, because it has an alarmingly high debt to equity ratio of 5.25. Its ROE is clearly quite good, but it seems to be boosted by the significant use of debt by the company.
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 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. Check the past profit growth by Shanghai Zhongyida by looking at this visualization of past earnings, revenue and cash flow.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies.
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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.
我們能做的最好的投資之一就是我們自己的知識和技能。考慮到這一點,本文將討論如何使用股本回報率(ROE)來更好地瞭解企業。為了讓這一課立足於實踐,我們將使用淨資產收益率來更好地瞭解上海中益達股份有限公司(上海證券交易所代碼:900906)。
股本回報率或淨資產收益率是股東要考慮的一個重要因素,因為它告訴他們他們的資本再投資的效率。換句話説,這是一個衡量公司股東提供的資本回報率的盈利比率。
查看我們對上海中怡達的最新分析
你如何計算股本回報率?
股本回報率可使用以下公式計算:
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,上海中怡達的淨資產收益率為:
41%=7200萬元×1.75億元(以截至2022年6月的12個月為基礎)。
“回報”指的是一家公司過去一年的收益。另一種説法是,公司每持有價值1美元的股票,就能賺取0.41美元的利潤。
上海中怡達的股本回報率高嗎?
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。然而,這種方法只是作為一種粗略的檢查,因為在同一行業分類中,公司確實有很大的不同。令人欣喜的是,上海中益達的淨資產收益率(ROE)高於機械行業的平均水平(8.1%)。
![roe](https://usnewsfile.futunn.com/pic/0-15066761-0-d9622521368fe5f83f6ddd8f88019cbc.png/big)
上證綜指:900906股本回報率2022年9月27日
這就是我們希望看到的。然而,請記住,高淨資產收益率並不一定意味着有效的利潤創造。除了淨利潤的變化外,高淨資產收益率也可能是高負債相對於股本的結果,這表明存在風險。
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。這些現金可以來自留存收益、發行新股(股權)或債務。在第一種和第二種情況下,淨資產收益率將反映對企業投資的現金使用情況。在後一種情況下,增長所需的債務將提高回報,但不會影響股東權益。這將使淨資產收益率看起來比不使用債務的情況下更好。
結合上海中怡達的債務及其41%的股本回報率
上海中怡達似乎大量利用債務來提高回報,因為它的債務股本比率高得驚人,高達5.25。其淨資產收益率顯然相當不錯,但似乎是受到了該公司大量使用債務的提振。
結論
股本回報率在比較不同企業的質量時很有用。在我們的賬目中,最高質量的公司擁有高股本回報率,儘管債務水平較低。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。通過查看過去收益、收入和現金流的可視化來檢查上海中怡達過去的利潤增長情況。
當然了,如果你把目光投向別處,你可能會發現這是一筆很棒的投資。所以讓我們來看看這個免費有趣的公司名單。
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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。