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 Ping An Insurance (Group) Company of China, Ltd. (SHSE:601318), by way of a worked example.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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 Ping An Insurance (Group) Company of China is:
8.7% = CN¥108b ÷ CN¥1.2t (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.09 in profit.
Does Ping An Insurance (Group) Company of China Have A Good ROE?
One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. The image below shows that Ping An Insurance (Group) Company of China has an ROE that is roughly in line with the Insurance industry average (9.3%).
SHSE:601318 Return on Equity May 10th 2024
That isn't amazing, but it is respectable. 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 a company takes on too much debt, it is at higher risk of defaulting on interest payments.
The Importance Of Debt To Return On Equity
Companies usually need to invest money to grow their profits. That cash can come from issuing shares, retained earnings, 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 use of debt will improve the returns, but will not change the equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.
Combining Ping An Insurance (Group) Company of China's Debt And Its 8.7% Return On Equity
Ping An Insurance (Group) Company of China clearly uses a high amount of debt to boost returns, as it has a debt to equity ratio of 1.78. 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 one way we can compare its business quality of different companies. 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. 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 I think it may be worth checking this free report on 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.
最も価値ある投資のひとつは、自身の知識やスキルセットに投資することです。この記事では、Return On Equity(ROE)を使用してビジネスをより理解する方法について説明します。これを理解するために、中国(Ping An Insurance (Group) Company of China, Ltd.(SHSE:601318))を例に示します。
ROEが良好であるかどうかを判断するために、業種平均と比較することができます。ただし、同じ業種でも会社によっては非常に異なるため、この方法には限界があります。下の図は、Ping An Insurance (Group) Company of ChinaのROEが保険業界平均(9.3%)とほぼ同じであることを示しています。
Ping An Insurance (Group) Company of Chinaの債務とROE(8.7%)を組み合わせると、明らかに高い債務を活用してそれなりの利益を上げています。債務にかなり依存しているにもかかわらず、ROEはかなり低く、私たちの意見では良い結果ではありません。債務が増えるとリスクが増し、将来的な選択肢が減ります。そのため、優れたROEを持つ企業からの受け取りという意味では、優れたビジネス品質を持つ企業を比較する方法の1つです。2つの企業が債務対権益比率がほぼ同じで、1つがより高いROEを持っている場合、私は一般的により高いROEを持つ企業を選択する傾向にあります。
Ping An Insurance (Group) Company of Chinaは、負債との比率が1.78であり、高額な債務を活用して利益を上げています。債務を多く抱えているにもかかわらず、ROEはかなり低く、私たちの意見では良い結果ではありません。債務はリスクを増やし、将来的な選択肢が減るため、それを活用した良い結果を得ることが一般的に望ましいです。
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。