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. To keep the lesson grounded in practicality, we'll use ROE to better understand Hengan International Group Company Limited (HKG:1044).
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Hengan International Group
How To 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 Hengan International Group is:
9.3% = CN¥1.9b ÷ CN¥20b (Based on the trailing twelve months to June 2023).
The 'return' is the yearly profit. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.09.
Does Hengan International Group Have A Good ROE?
Arguably the easiest way to assess company's ROE is to compare it with the average in its industry. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. You can see in the graphic below that Hengan International Group has an ROE that is fairly close to the average for the Personal Products industry (8.3%).
SEHK:1044 Return on Equity November 24th 2023
So while the ROE is not exceptional, at least its acceptable. While at least the ROE is not lower than the industry, its still worth checking what role the company's debt plays as high debt levels relative to equity may also make the ROE appear high. If true, then it is more an indication of risk than the potential. To know the 2 risks we have identified for Hengan International Group visit our risks dashboard for free.
Why You Should Consider Debt When Looking At ROE
Virtually all companies need money to invest in the business, to grow profits. That cash can come from issuing shares, retained earnings, or debt. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the use of debt will improve the returns, but will not change the equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.
Combining Hengan International Group's Debt And Its 9.3% Return On Equity
Hengan International Group does use a high amount of debt to increase returns. It has a debt to equity ratio of 1.18. Its ROE is quite low, even with the use of significant debt; that's not a good result, in our opinion. Debt increases risk and reduces options for the company in the future, so you generally want to see some good returns from using it.
Conclusion
Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. A company that can achieve a high return on equity without debt could be considered a high quality business. All else being equal, a higher ROE is better.
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.
Of course Hengan International Group may not be the best stock to buy. So you may wish to see this free collection of other companies that have 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.
一部の投資家はすでに財務指標に通じていますが(参考までに)、この記事では、Return On Equity(ROE)について学びたい人のために説明します。 ROEがなぜ重要かを説明します。実用性に関してレッスンを繰り返すため、ROEを使用してHengan International Group Company Limited(HKG:1044)をよりよく理解します。
企業のROEを評価する最も簡単な方法は、同じ業種の平均と比較することです。ただし、企業は同じ業種分類内でもかなり異なるため、この方法は大まかなチェックとしてのみ有用です。下のグラフで確認できますが、Hengan International GroupのROEは、個人用製品業界の平均(8.3%)にかなり近いです。
SEHK:1044 ROE November 24th 2023
"ROEは例外的ではありませんが、少なくとも受け入れ可能です。ROEが業界よりも低くない場合でも、企業の債務がROEを高く見せる場合があります。当てはまる場合、これは潜在的なものではなく、リスクの指標となります。Hengan International Groupの識別した2つのリスクを知るには、無料のリスクダッシュボードを訪問してください。"
Hengan International Groupは、収益を増やすために高額な債務を使用しています。その債務対資本比率は1.18です。債務の利用にもかかわらず、ROEはかなり低く、私たちの意見では良くありません。債務によりリスクが増し、将来の企業の選択肢が減少するため、良いリターンを見ることが一般的です。
オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。
オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。