Many investors are still learning about the various metrics that can be useful when analysing a stock. This article is for those who would like to learn about Return On Equity (ROE). By way of learning-by-doing, we'll look at ROE to gain a better understanding of Health and Happiness (H&H) International Holdings Limited (HKG:1112).
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.
How Is ROE Calculated?
Return on equity 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 Health and Happiness (H&H) International Holdings is:
9.2% = CN¥582m ÷ CN¥6.3b (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.09 in profit.
Does Health and Happiness (H&H) International Holdings Have A Good Return On Equity?
Arguably the easiest way to assess company's ROE is to compare it with the average in its industry. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. If you look at the image below, you can see Health and Happiness (H&H) International Holdings has a similar ROE to the average in the Food industry classification (8.7%).
That's neither particularly good, nor bad. Even if the ROE is respectable when compared to the industry, its worth checking if the firm's ROE is being aided by high debt levels. If a company takes on too much debt, it is at higher risk of defaulting on interest payments. Our risks dashboardshould have the 3 risks we have identified for Health and Happiness (H&H) International Holdings.
Why You Should Consider Debt When Looking At ROE
Virtually all companies need money to invest in the business, to grow 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 required for growth will boost returns, but will not impact the shareholders' equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.
Combining Health and Happiness (H&H) International Holdings' Debt And Its 9.2% Return On Equity
Health and Happiness (H&H) International Holdings clearly uses a high amount of debt to boost returns, as it has a debt to equity ratio of 1.45. The combination of a rather low ROE and significant use of debt is not particularly appealing. Investors should think carefully about how a company might perform if it was unable to borrow so easily, because credit markets do change over time.
Conclusion
Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. In our books, the highest quality companies have high return on equity, despite low debt. 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. 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.
But note: Health and Happiness (H&H) International Holdings may not be the best stock to buy. So take a peek at this free list of interesting companies with 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.
多くの投資家は、株式を分析する際に有用な様々なメトリックについてまだ学んでいるといえます。本稿は、Return On Equity(ROE)について学びたいと思っている人たちのためです。学んで実践することで、H&H International Holdings Limited(HKG:1112)のROEを見て、健康と幸福に対するより良い理解を得ることができます。
自己資本利益率(Return on Equity、ROE)は、企業が自分の価値をいかに成長させ、株主がため込んだ資本をいかに運用しているかを試験するものです。言い換えると、企業が株主に提供した自己資本に対する利益率を測定する収益能力比率です。
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、同じ業種に属する企業でも、いくつかはかなり異なる場合があります。以下の画像を見ると、H&H International HoldingsのROEはフード業界の平均(8.7%)と類似していることがわかります。
それはそれほど良くも悪くもありません。業界と比較してROEが優れていても、企業のROEが高い債務水準に支えられているかどうかを確認することは価値があります。企業があまりにも多額の債務を負うと、利息支払いに立ち行きが悪くなります。リスク・ダッシュボードには、Health and Happiness(H&H)International Holdingsの特定された3つのリスクが記載されています。
Health and Happiness(H&H)International Holdingsの債務と9.2%のROEを組み合わせる
Health and Happiness(H&H)International Holdingsは、債務と自己資本比率が1.45であるため、リターンを増やすためにかなりの債務を使用しています。ROEが比較的低く、債務使用が大きいため、魅力的ではありません。クレジット市場は時間の経過とともに変化するため、会社が簡単に借り入れできなくなった場合の業績についてよく考える必要があります。