With a return on equity of 3.0%, is Kaisa Capital Investment Holdings Limited (HKG:936) a quality stock?

Many investors are still learning the different metrics that can be useful when analyzing a stock. This article is for those who want to know more about return on equity (ROE). Learning by doing, we will look at ROE to better understand Kaisa Capital Investment Holdings Limited (HKG:936).

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for Kaisa Capital Investment Holdings

How to calculate return on equity?

ROE can be calculated using the formula:

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

So, based on the above formula, the ROE of Kaisa Capital Investment Holdings is:

3.0% = HK$4.0 million ÷ HK$132 million (based on trailing 12 months to December 2021).

The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every HK$1 of share capital it has, the company has made a profit of HK$0.03.

Does Kaisa Capital Investment Holdings have a good return on equity?

Perhaps the easiest way to assess a company’s ROE is to compare it to the industry average. The limitation of this approach is that some companies are very different from others, even within the same industrial classification. As shown in the graph below, Kaisa Capital Investment Holdings has a below average ROE (6.7%) in the Commercial Distributor industry classification.

SEHK: 936 Return on Equity August 4, 2022

That’s not what we like to see. That being said, a low ROE is not always a bad thing, especially if the company has low leverage, as it still leaves room for improvement should the company take on more debt. A highly leveraged company with a low ROE is a whole other story and a risky investment on our books. To learn about the 4 risks we have identified for Kaisa Capital Investment Holdings, visit our risk dashboard for free.

What is the impact of debt on return on equity?

Virtually all businesses need money to invest in the business, to increase their profits. The money for the investment can come from the previous year’s earnings (retained earnings), from issuing new shares or from borrowing. In the first and second case, the ROE will reflect this use of cash for investment in the business. In the latter case, the use of debt will improve returns, but will not change equity. So using debt can improve ROE, but with the added risk of stormy weather, metaphorically speaking.

Kaisa Capital Investment Holdings’ debt and its ROE of 3.0%

Kaisa Capital Investment Holdings uses a high amount of debt to increase returns. Its debt to equity ratio is 1.43. The combination of a rather low ROE and heavy reliance on debt is not particularly attractive. Investors need to think carefully about how a company would perform if it weren’t able to borrow so easily, as credit markets change over time.

Conclusion

Return on equity is a way to compare the business 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 when a company is of high quality, the market often gives it a price that reflects that. The rate at which earnings are likely to grow, relative to earnings growth expectations reflected in the current price, should also be considered. So I think it’s worth checking it out free this detailed graph past profits, revenue and cash flow.

Sure Kaisa Capital Investment Holdings may not be the best stock to buy. So you might want to see this free collection of other companies that have high ROE 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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