【does culver's have walleye right now】Should You Be Concerned About Super Strong Holdings Limited’s (HKG:8262) ROE?

Many investors are still learning about the various metrics that can be useful when analysing a stock. This does culver's have walleye right nowarticle is for those who would like to learn about Return On Equity (ROE). We’ll use ROE to examine Super Strong Holdings Limited (

HKG:8262

), by way of a worked example.

Super Strong Holdings has a ROE of 6.1%

, based on the last twelve months. One way to conceptualize this, is that for each HK$1 of shareholders’ equity it has, the company made HK$0.061 in profit.

See our latest analysis for Super Strong Holdings

How Do I Calculate ROE?

The

formula for return on equity

is:

Return on Equity = Net Profit ÷ Shareholders’ Equity

Or for Super Strong Holdings:

6.1% = 10.426 ÷ HK$172m (Based on the trailing twelve months to September 2018.)

Most readers would understand what net profit is, but it’s worth explaining the concept of shareholders’ equity. It is the capital paid in by shareholders, plus any retained earnings. Shareholders’ equity can be calculated by subtracting the total liabilities of the company from the total assets of the company.

What Does Return On Equity Signify?

ROE looks at the amount a company earns relative to the money it has kept within the business. The ‘return’ is the yearly profit. The higher the ROE, the more profit the company is making. So, all else equal,

investors should like a high ROE

. That means ROE can be used to compare two businesses.

Does Super Strong 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 Super Strong Holdings has a lower ROE than the average (12%) in the Construction industry classification.

SEHK:8262 Last Perf January 3rd 19

Unfortunately, that’s sub-optimal. It is better when the ROE is above industry average, but a low one doesn’t necessarily mean the business is overpriced. Nonetheless, it could be useful to

double-check if insiders have sold shares recently

.

How Does Debt Impact Return On Equity?

Most companies need money — from somewhere — to grow their profits. That cash can come from retained earnings, issuing new shares (equity), 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 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.

Story continues

Combining Super Strong Holdings’s Debt And Its 6.1% Return On Equity

Super Strong Holdings has a debt to equity ratio of just 0.05, which is very low. Its ROE isn’t particularly impressive, but the debt levels are quite modest, so the business probably has some real potential. Careful use of debt to boost returns is often very good for shareholders. However, it could reduce the company’s ability to take advantage of future opportunities.

In Summary

Return on equity is one way we can compare the business quality of different companies. Companies that can achieve high returns on equity without too much debt are generally of good quality. 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 when a business is high quality, the market often bids it up to a price that reflects this. It is important to consider other factors, such as future profit growth — and how much investment is required going forward. So I think it may be worth checking this

free

this

detailed graph

of past earnings, revenue and cash flow

.

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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at

[email protected]

.

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