Yahoo Finance Geely Automobile Holdings Limited (HKG:175) Delivered A Better ROE Than The Industry, Here’s Why
This article is intended for those of you who are at the beginning of your investing journey and want a simplistic look at the return on Geely Automobile Holdings Limited (HKG:175) stock.
Geely Automobile Holdings Limited (HKG:175) outperformed the Automobile Manufacturers industry on the basis of its ROE – producing a higher 30.84% relative to the peer average of 14.48% over the past 12 months. While the impressive ratio tells us that 175 has made significant profits from little equity capital, ROE doesn’t tell us if 175 has borrowed debt to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable 175’s ROE is. See our latest analysis for Geely Automobile Holdings
What you must know about ROE
Return on Equity (ROE) weighs Geely Automobile Holdings’s profit against the level of its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of Geely Automobile Holdings’s equity capital deployed. Its cost of equity is 10.30%. This means Geely Automobile Holdings returns enough to cover its own cost of equity, with a buffer of 20.54%. This sustainable practice implies that the company pays less for its capital than what it generates in return. ROE can be dissected into three distinct 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
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover shows how much revenue Geely Automobile Holdings can generate with its current 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 financial leverage can artificially inflate ROE, we need to look at how much debt Geely Automobile Holdings currently has. At 3.72%, Geely Automobile Holdings’s debt-to-equity ratio appears low and indicates the above-average ROE is generated from its capacity to increase profit without a large debt burden.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Geely Automobile Holdings’s above-industry ROE is encouraging, and is also in excess of its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Geely Automobile Holdings, I’ve put together three fundamental factors you should further examine:
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 Geely Automobile Holdings 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 Geely Automobile Holdings is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Geely Automobile Holdings? 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.
