This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Bisu Technology Group International Limited (HKG:1372).
Bisu Technology Group International Limited (HKG:1372) delivered a less impressive 5.37% ROE over the past year, compared to the 11.59% return generated by its industry. Though 1372’s recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on 1372’s below-average returns. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of 1372’s returns. Let me show you what I mean by this. Check out our latest analysis for Bisu Technology Group International
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) weighs Bisu Technology Group International’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. Investors seeking to maximise their return in the Construction and Engineering industry may want to choose the highest returning stock. But this can be misleading as each company has different costs of equity and also varying debt levels, which could artificially push up ROE whilst accumulating high interest expense.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for Bisu Technology Group International, which is 9.18%. This means Bisu Technology Group International’s returns actually do not cover its own cost of equity, with a discrepancy of -3.81%. This isn’t sustainable as it implies, very simply, that the company pays more for its capital than what it generates in return. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the 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 Bisu Technology Group International can make from its asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. We can determine if Bisu Technology Group International’s ROE is inflated by borrowing high levels of debt. Generally, a balanced capital structure means its returns will be sustainable over the long run. We can examine this by looking at Bisu Technology Group International’s debt-to-equity ratio. The most recent ratio is 129.23%, which is relatively proportionate and indicates Bisu Technology Group International has not taken on extreme leverage. Thus, we can conclude its current ROE is generated from its capacity to increase profit without a massive debt burden.
While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. Bisu Technology Group International’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. Although, its appropriate level of leverage means investors can be more confident in the sustainability of Bisu Technology Group International’s return with a possible increase should the company decide to increase its debt levels. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Bisu Technology Group International, there are three important factors you should further research:
- 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.
- Future Earnings: How does Bisu Technology Group International’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Bisu Technology Group International? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!