[ad_1]
Do you want to participate in a short research study? Help us shape the future of investment tools and get a chance to win a $ 250 gift card!
Many investors are still becoming familiar with the various measures that may be useful when badyzing a security. This article is for people who want to know more about Return on Equity (ROE).
For the lesson to remain rooted in practice, we will use ROE to better understand WuXi Biologics (Cayman) Inc. (HKG: 2269).
WuXi Biologics (Cayman) has a ROE of 5.5%, based on the last twelve months.
One way to conceptualize this is that for every HKD dollar of shareholders, the company made a profit of HK $ 0.055.
Discover our latest tests for WuXi Biologics (Cayman)
How do you calculate ROE?
the formula for ROE is:
Return on Equity = Net Earnings Equity Equity
Or for WuXi Biologics (Cayman):
5.5% = 410.001 ÷ CN ¥ 7.5b (Based on the twelve months prior to June 2018.)
Most readers would understand what's the net profit, but it's helpful to explain the concept of own funds.
This is the capital paid by shareholders, plus retained earnings.
The simplest way to calculate equity is to subtract the total liabilities of the company from the total badets.
What does return on equity mean?
ROE measures the profitability of a company in relation to the profits it retains and to any external investment.
The "return" is the annual profit.
A higher profit will lead to a higher ROE.
So, as a rule, a high ROE is a good thing.
This means that ROE can be used to compare two companies.
Does WuXi Biologics (Cayman) have a good return on equity?
By comparing a company's ROE to its industry average, we can get a quick measure of its quality.
It is important to note that this is far from being a perfect measure, as companies differ considerably within the same industrial clbadification.
If you look at the image below, you will find that the WuXi Biologics (Cayman) SPC is below the average (7.8%) of the life sciences sector.
Unfortunately, this is not optimal.
We would prefer to see ROE above the industry average, but the fact that the business is undervalued does not matter.
Nevertheless, it might be wise to check if insiders have sold.
Why should you consider a debt when you examine the ROE?
Most businesses need money – from somewhere – to increase their profits.
This money can come from issued shares, undistributed profits or debts.
In the case of the first and second options, the ROE will reflect this cash utilization for growth.
In the latter case, the use of debt will improve returns, but will not change equity.
In this way, the use of debt will increase the ROE, even if the basic economy of the company remains the same.
Combination of WuXi Biologics (Cayman) debt and its return on equity of 5.5%
One of the positive things for shareholders is that WuXi Biologics (Cayman) has no net debt!
So, even if his ROE is not so impressive, we should not judge him severely on this measure because he has not used any debt.
In the end, when a company has no debt, it is better positioned to seize future growth opportunities.
The final result on ROE
Return on equity is one of the ways in which we can compare the quality of activity of different companies.
In my book, high quality companies have a high return on equity, despite low debt.
All other things being equal, a higher ROE is preferable.
But when a company is of high quality, the market often offers it a price that takes it into account.
The probable rate of profit growth relative to the earnings growth forecast reflected in the current price must also be taken into account.
You may want to check this FREE preview of the company's badyst forecasts.
Of course, you could find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies.
To help readers understand the past volatility of the financial market in the short term, our goal is to provide you with a long-term research badysis based solely on fundamental data. Note that our badysis does not take into account the latest price sensitive business announcements.
The author is an independent contributor and, at the time of publication, was not positioned in the actions mentioned. For errors that need to be corrected, please contact the publisher at [email protected].
TOP undervalued shares for 2017
Looking for undervalued stocks? The trick is not to follow the flock. These neglected firms are now trading at prices below their intrinsic value. Click here to view them for FREE on Simply Wall St.
Source link
