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.
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。我們將用淨資產收益率對廣東第二水電工程股份有限公司(深圳證券交易所:002060)進行實證分析。
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。換句話說,它揭示了該公司成功地將股東投資轉化為利潤。
查看我們對廣東第二水電工程公司的最新分析
淨資產收益率是如何計算的?
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,廣東第二水電工程公司的淨資產收益率為:
8.6%=3.69億元×43億元(以截至2022年9月的12個月為基礎)。
“回報”指的是企業在過去一年中獲得的收入。一種概念化的方法是,公司每擁有1元人民幣的股東資本,就會獲得0.09元人民幣的利潤。
廣東第二水電工程公司的股本回報率好嗎?
通過將一家公司的淨資產收益率(ROE)與其行業平均水準進行比較,我們可以快速衡量它有多好。重要的是,這遠遠不是一個完美的衡量標準,因為在同一行業分類中,公司的差異很大。從下圖可以看到,廣東第二水電工程公司的淨資產收益率(ROE)相當接近建築業的平均水準(7.8%)。
深圳證券交易所:002060股本回報率2022年12月15日
這並不令人驚訝,但它是值得尊敬的。儘管淨資產收益率與行業類似,但我們仍應進行進一步檢查,看看公司的淨資產收益率是否受到高債務水準的提振。如果是這樣的話,這將增加其金融風險敞口。我們的風險儀錶板應該有我們為廣東第二水電工程公司確定的兩個風險。
為什麼在考慮淨資產收益率時應該考慮債務
公司通常需要投入資金來增加利潤。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。
廣東第二水電工程公司債務及其8.6%的淨資產收益率
廣東第二水電工程公司似乎大量使用債務來提高回報,因為該公司的債務權益比率高得驚人,高達4.35。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。
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,儘管債務水準較低。如果兩家公司的債務權益比大致相同,而其中一家公司的淨資產收益率更高,我通常會更喜歡淨資產收益率更高的那家公司。
但淨資產收益率只是一個更大的謎題的一部分,因為高質量企業的本益比往往很高。相對於股價反映的預期,利潤增長率是一個特別重要的考慮因素。因此,你可能想查看分析師對該公司預測的免費可視化。
如果你更願意看看另一家公司--一家財務狀況可能更好的公司--那麼不要錯過這一點免費列出了一些有趣的公司,這些公司擁有高股本回報率和低債務。
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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。