Yahoo Finance What is Behind Winson Holdings Hong Kong Limited’s (HKG:8421) Superior ROE?
With an ROE of 19.22%, Winson Holdings Hong Kong Limited (SEHK:8421) outpaced its own industry which delivered a less exciting 8.43% over the past year. On the surface, this looks fantastic since we know that 8421 has made large profits from little equity capital; however, ROE doesn’t tell us if management have borrowed heavily to make this happen. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of 8421’s ROE. Check out our latest analysis for Winson Holdings Hong Kong
Breaking down Return on Equity
Return on Equity (ROE) is a measure of Winson Holdings Hong Kong’s profit relative to its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
Returns are usually compared to costs to measure the efficiency of capital. Winson Holdings Hong Kong’s cost of equity is 8.44%. Since Winson Holdings Hong Kong’s return covers its cost in excess of 10.78%, its use of equity capital is efficient and likely to be sustainable. Simply put, Winson Holdings Hong Kong pays less for its capital than what it generates in return. ROE can be broken down into three different ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
Dupont Formula
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. The other component, asset turnover, illustrates how much revenue Winson Holdings Hong Kong can make from its asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since ROE can be artificially increased through excessive borrowing, we should check Winson Holdings Hong Kong’s historic debt-to-equity ratio. The debt-to-equity ratio currently stands at a low 15.46%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Winson Holdings Hong Kong’s ROE is impressive relative to the industry average and also covers its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. Although ROE can be a useful metric, it is only a small part of diligent research.
For Winson Holdings Hong Kong, I’ve compiled three fundamental factors you should look at:
Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Valuation: What is Winson Holdings Hong Kong worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Winson Holdings Hong Kong is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Winson Holdings Hong Kong? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass 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.
