Many investors are still educating themselves about the various metrics that can be useful when analyzing a stock. This article is for those who want to learn more about return on equity (ROE). As a learning by doing, we will look at the ROE to better understand Ganglong China Property Group Limited (HKG: 6968).

Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.

Check out our latest review for Ganglong China Property Group

How to calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

Thus, based on the above formula, the ROE of Ganglong China Property Group is:

8.7% = CN ¥ 774m CN ¥ 8.9b (Based on the last twelve months to June 2021).

“Return” refers to a company’s profits over the past year. So this means that for every HK $ 1 invested by its shareholder, the company generates a profit of HK $ 0.09.

Does Ganglong China Property Group have a good ROE?

Perhaps the easiest way to assess a company’s ROE is to compare it to the industry average. However, this method is only useful as a rough check, as companies differ a little within the same industry classification. The image below shows that Ganglong China Property Group has an ROE which is roughly in line with the real estate industry average (9.2%).

SEHK: 6968 Return on equity October 29, 2021

So even if the ROE is not exceptional, it is at least acceptable. Even though the ROE is respectable compared to the industry, it is worth checking out if the company’s ROE is helped by high debt levels. If so, it increases their exposure to financial risk. You can see the 4 risks we have identified for Ganglong China Property Group by visiting our risk dashboard for free on our platform here.

What is the impact of debt on ROE?

Businesses generally need to invest money to increase their profits. This liquidity can come from the issuance of shares, retained earnings or debt. In the first and second cases, the ROE will reflect this use of cash for investing in the business. In the latter case, the debt necessary for growth will increase returns, but will have no impact on equity. So, using debt can improve ROE, but with added risk in stormy weather, metaphorically speaking.

Combine Ganglong China Property Group debt and its 8.7% return on equity

Ganglong China Property Group uses a large amount of debt to increase returns. It has a debt ratio of 1.36. With a fairly low ROE and heavy use of debt, it’s hard to get excited about this business right now. Investors should think carefully about how a business will perform if it weren’t able to borrow so easily, as credit markets change over time.

Conclusion

Return on equity is useful for comparing the quality of different companies. Firms that can earn high returns on equity without taking on too much debt are generally of good quality. All other things being equal, a higher ROE is preferable.

But ROE is only one piece of a bigger puzzle, as high-quality companies often trade at high earnings multiples. The rate at which earnings are likely to grow, relative to earnings growth expectations reflected in the current price, must also be considered. So I think it’s worth checking this out free this detailed graphic past profits, income and cash flow.

Sure Ganglong China Property Group may not be the best stock to buy. So you might want to see this free collection of other companies with high ROE and low leverage.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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