A closer look at the impressive ROE of New Hope Service Holdings Limited (HKG: 3658)

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 look at New Hope Service Holdings Limited (HKG:3658), as a concrete example.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Check out our latest analysis for New Hope Service Holdings

How is ROE calculated?

the return on equity formula is:

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

So, based on the above formula, the ROE for New Hope Service Holdings is:

17% = CN¥166 million ÷ CN¥954 million (based on the last twelve months to December 2021).

The “yield” is the profit of the last twelve months. This means that for every HK$1 of equity, the company generated HK$0.17 of profit.

Does New Hope Service Holdings 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. Fortunately, New Hope Service Holdings has an above-average ROE (7.2%) for the real estate industry.

SEHK:3658 Return on Equity April 28, 2022

It’s a good sign. 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 return on equity?

Most businesses need money – from somewhere – to increase their profits. This money can come from issuing shares, retained earnings or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, debt used for growth will enhance returns, but will not affect total equity. This will make the ROE better than if no debt was used.

The debt of New Hope Service Holdings and its ROE of 17%

New Hope Service Holdings has no net debt, which is positive for shareholders. Its ROE suggests it’s a decent company; and the fact that it does not take advantage of returns indicates that it is worth watching. Ultimately, when a company has zero debt, it is better positioned to seize future growth opportunities.

Summary

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

But ROE is only one piece of a larger puzzle, as high-quality companies often trade on high earnings multiples. It is important to consider other factors, such as future earnings growth and the amount of investment needed in the future. 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.

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.

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