Australia markets closed
  • ALL ORDS

    6,168.00
    -93.80 (-1.50%)
     
  • AUD/USD

    0.7057
    +0.0008 (+0.11%)
     
  • ASX 200

    5,960.30
    -97.40 (-1.61%)
     
  • OIL

    37.34
    -0.05 (-0.13%)
     
  • GOLD

    1,880.60
    +1.40 (+0.07%)
     
  • BTC-AUD

    18,639.43
    -7.95 (-0.04%)
     
  • CMC Crypto 200

    260.37
    -12.32 (-4.52%)
     

Taking A Look At Wanguo International Mining Group Limited's (HKG:3939) ROE

Simply Wall St

While some investors are already well versed in financial metrics (hat tip), this article is for those who would like to learn about Return On Equity (ROE) and why it is important. By way of learning-by-doing, we'll look at ROE to gain a better understanding of Wanguo International Mining Group Limited (HKG:3939).

Over the last twelve months Wanguo International Mining Group has recorded a ROE of 6.8%. One way to conceptualize this, is that for each HK$1 of shareholders' equity it has, the company made HK$0.07 in profit.

Check out our latest analysis for Wanguo International Mining Group

How Do I Calculate ROE?

The formula for ROE is:

Return on Equity = Net Profit ÷ Shareholders' Equity

Or for Wanguo International Mining Group:

6.8% = CN¥55m ÷ CN¥805m (Based on the trailing twelve months to June 2019.)

It's easy to understand the 'net profit' part of that equation, but 'shareholders' equity' requires further explanation. It is all the money paid into the company from shareholders, plus any earnings retained. You can calculate shareholders' equity by subtracting the company's total liabilities from its total assets.

What Does Return On Equity Signify?

ROE measures a company's profitability against the profit it retains, and any outside investments. The 'return' is the profit over the last twelve months. That means that the higher the ROE, the more profitable the company is. So, all else equal, investors should like a high ROE. Clearly, then, one can use ROE to compare different companies.

Does Wanguo International Mining Group 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. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. If you look at the image below, you can see Wanguo International Mining Group has a similar ROE to the average in the Metals and Mining industry classification (7.4%).

SEHK:3939 Past Revenue and Net Income, December 15th 2019
SEHK:3939 Past Revenue and Net Income, December 15th 2019

That's neither particularly good, nor bad. ROE doesn't tell us if the share price is low, but it can inform us to the nature of the business. For those looking for a bargain, other factors may be more important. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

How Does Debt Impact ROE?

Companies usually need to invest money to grow their profits. That cash 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, 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.

Combining Wanguo International Mining Group's Debt And Its 6.8% Return On Equity

Although Wanguo International Mining Group does use debt, its debt to equity ratio of 0.14 is still low. I'm not impressed with its ROE, but the debt levels are not too high, indicating the business has decent prospects. 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.

In Summary

Return on equity is useful for comparing the quality of different businesses. A company that can achieve a high return on equity without debt could be considered a high quality business. If two companies have the same ROE, then I would generally prefer the one with less debt.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. Profit growth rates, versus the expectations reflected in the price of the stock, are a particularly important to consider. 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.

But note: Wanguo International Mining Group may not be the best stock to buy. So take a peek at this free list of interesting companies with high ROE and low debt.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.