【why is my garage door beeping when opening】Should You Be Worried About Janco Holdings Limited’s (HKG:8035) 2.0% Return On Equity?

While some investors are already well versed in financial metrics (hat tip),why is my garage door beeping when opening this article is for those who would like to learn about Return On Equity (ROE) and why it is important. We’ll use ROE to examine Janco Holdings Limited (

HKG:8035

), by way of a worked example.

Over the last twelve months

Janco Holdings has recorded a ROE of 2.0%

. Another way to think of that is that for every HK$1 worth of equity in the company, it was able to earn HK$0.020.

See our latest analysis for Janco Holdings

How Do I Calculate ROE?

The

formula for ROE

is:

Return on Equity = Net Profit ÷ Shareholders’ Equity

Or for Janco Holdings:

2.0% = 1.876 ÷ HK$93m (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 ROE Mean?

Return on Equity measures a company’s profitability against the profit it has kept for the business (plus any capital injections). The ‘return’ is the profit over the last twelve months. That means that the higher the ROE, the more profitable the company is. So, as a general rule,

a high ROE is a good thing

. That means it can be interesting to compare the ROE of different companies.

Does Janco Holdings Have A Good Return On Equity?

One 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, because companies do differ quite a bit within the same industry classification. As is clear from the image below, Janco Holdings has a lower ROE than the average (12%) in the Logistics industry.

SEHK:8035 Last Perf January 2nd 19

That’s not what we like to see. 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

.

The Importance Of Debt To Return On Equity

Most companies need money — from somewhere — to grow their profits. That cash can come from issuing shares, 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 debt used for growth will improve returns, but won’t affect the total 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 Janco Holdings’s Debt And Its 2.0% Return On Equity

While Janco Holdings does have some debt, with debt to equity of just 0.62, we wouldn’t say debt is excessive. Its ROE is quite low, and the company already has some debt, so surely shareholders are hoping for an improvement. Conservative use of debt to boost returns is usually a good move for shareholders, though it does leave the company more exposed to interest rate rises.

But It’s Just One Metric

Return on equity is useful for comparing the quality of different businesses. Companies that can achieve high returns on equity without too much debt are generally of good quality. All else being equal, a higher ROE is better.

But when a business is high quality, the market often bids it up to a price that reflects this. 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. You can see how the company has grow in the past by looking at this FREE

detailed graph

of past earnings, revenue and cash flow

.

Of course,

you might find a fantastic investment by looking elsewhere.

So take a peek at this

free

list of interesting companies.

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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