Why Yuexiu Services Group Limited (HKG:6626) looks like a quality company
While some investors are already familiar with financial metrics (hat trick), this article is for those who want to learn more about return on equity (ROE) and why it matters. We will use ROE to examine Yuexiu Services Group Limited (HKG:6626), as a concrete example.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for Yuexiu Services Group
How to calculate return on equity?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Yuexiu Services Group is:
12% = CN¥370 million ÷ CN¥3.1 billion (based on the last twelve months to December 2021).
“Yield” refers to a company’s earnings over the past year. Another way to think about this is that for every HK$1 of equity, the company was able to make a profit of HK$0.12.
Does Yuexiu Services Group have a good return on equity?
A simple way to determine if a company has a good return on equity is to compare it to the average for its industry. However, this method is only useful as a rough check, as companies differ quite a bit within the same industry classification. As the image below clearly shows, Yuexiu Services Group has a better ROE than the average (7.2%) in the real estate industry.
This is clearly a positive point. Keep in mind that a high ROE does not always mean superior financial performance. A higher proportion of debt in a company’s capital structure can also result in a high ROE, where high debt levels could be a huge risk.
What is the impact of debt on ROE?
Virtually all businesses need money to invest in the business, to increase their profits. This money can come from issuing stocks, retained earnings or debt. In the case of the first and second options, the ROE will reflect this use of cash, 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 ROE, even though the core economics of the business remains the same.
Yuexiu Services Group’s debt and its ROE of 12%
Shareholders will be delighted to learn that Yuexiu Services Group does not have an iota of net debt! Its respectable ROE suggests it’s a company worth watching, but it’s even better that the company has achieved this without leverage. Ultimately, when a company has zero debt, it is better positioned to seize future growth opportunities.
Return on equity is a useful indicator of a company’s ability to generate profits and return them to shareholders. In our books, the highest quality companies have a high return on equity, despite low leverage. If two companies have the same ROE, I would generally prefer the one with less debt.
That said, while ROE is a useful indicator of a company’s quality, you’ll need to consider a whole host of factors to determine the right price to buy a stock. The rate at which earnings are likely to grow, relative to earnings growth expectations reflected in the current price, should also be considered. You might want to check out this FREE analyst forecast visualization for the company.
If you’d rather check out another company – one with potentially superior finances – then don’t miss this free list of attractive companies, which have a high return on equity and low debt.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.