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. We'll use ROE to examine PCCW Limited (HKG:8), 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for PCCW
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 PCCW is:
24% = HK$3.0b ÷ HK$12b (Based on the trailing twelve months to June 2022).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.24 in profit.
Does PCCW 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. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. As is clear from the image below, PCCW has a better ROE than the average (8.8%) in the Telecom industry.
SEHK:8 Return on Equity December 10th 2022
That's what we like to see. However, bear in mind that a high ROE doesn't necessarily indicate efficient profit generation. Especially when a firm uses high levels of debt to finance its debt which may boost its ROE but the high leverage puts the company at risk. To know the 2 risks we have identified for PCCW 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 first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt required for growth will boost returns, but will not impact the shareholders' equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.
PCCW's Debt And Its 24% ROE
It appears that PCCW makes extensive use of debt to improve its returns, because it has an alarmingly high debt to equity ratio of 4.02. Its ROE is clearly quite good, but it seems to be boosted by the significant use of debt by the company.
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 around the same level of debt to equity, and one has a higher ROE, I'd generally prefer the one with higher ROE.
Having said that, while ROE is a useful indicator of business quality, you'll have to look at a whole range of factors to determine the right price to buy a stock. The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. So you might want to check this FREE visualization of analyst forecasts for the company.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies.
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.
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。我們將使用淨資產收益率來分析電訊盈科有限公司(HKG：8)，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。換句話說，這是一個衡量公司股東提供的資本回報率的盈利比率。
查看我們對電訊盈科的最新分析
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，電訊盈科的淨資產收益率為：
24%=30億港元×120億港元(根據截至2022年6月的過去12個月計算)。
“回報”指的是一家公司過去一年的收益。一種將其概念化的方法是，公司每持有1港元的股東資本，就能獲得0.24港元的利潤。
電訊盈科的股本回報率高嗎？
通過將一家公司的淨資產收益率(ROE)與其行業平均水準進行比較，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。從下圖可以清楚地看出，電訊盈科的淨資產收益率(ROE)高於電信行業的平均水準(8.8%)。
聯交所：8股本回報率2022年12月10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著有效的利潤創造。尤其是當一家公司使用高水平的債務為其債務融資時，這可能會提高其淨資產收益率，但高槓桿將公司置於風險之中。要了解我們為電訊盈科確定的兩個風險，請免費訪問我們的風險儀錶板。
為什麼在考慮淨資產收益率時應該考慮債務
幾乎所有的公司都需要資金來投資於業務，以增加利潤。這些現金可以來自發行股票、留存收益或債務。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，增長所需的債務將提高回報，但不會影響股東權益。因此，債務的使用可以提高淨資產收益率，儘管打個比方說，在暴風雨天氣的情況下會有額外的風險。
電訊盈科的債務及其24%的淨資產收益率
電訊盈科似乎大量利用債務來提高回報，因為它的負債與股本比率高得驚人，高達4.02。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。
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。
話雖如此，雖然淨資產收益率是衡量業務質量的有用指標，但你必須考慮一系列因素，才能確定購買股票的合適價格。相對於當前價格反映的利潤增長預期，也必須考慮利潤可能增長的速度。因此，你可能想查看分析師對該公司預測的免費可視化。
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。
對這篇文章有什麼反饋嗎？擔心內容嗎？ 保持聯繫直接與我們聯繫。或者，也可以給編輯組發電子郵件，地址是implywallst.com。
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。
