Stock Analysis

Is Ritamix Global Limited's (HKG:1936) 7.4% ROE Strong Compared To Its Industry?

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SEHK:1936
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One of the best investments we can make is in our own knowledge and skill set. With that in mind, this article will work through how we can use Return On Equity (ROE) to better understand a business. We'll use ROE to examine Ritamix Global Limited (HKG:1936), by way of a worked example.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Ritamix Global

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Ritamix Global is:

7.4% = RM10m ÷ RM138m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.07 in profit.

Does Ritamix Global Have A Good ROE?

By comparing a company's ROE with its industry average, we can get a quick measure of how good it is. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. The image below shows that Ritamix Global has an ROE that is roughly in line with the Consumer Retailing industry average (6.2%).

roe
SEHK:1936 Return on Equity November 26th 2020

That's neither particularly good, nor bad. While at least the ROE is not lower than the industry, its still worth checking what role the company's debt plays as high debt levels relative to equity may also make the ROE appear high. If so, this increases its exposure to financial risk. Our risks dashboardshould have the 4 risks we have identified for Ritamix Global.

How Does Debt Impact Return On Equity?

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 debt required for growth will boost returns, but will not impact the shareholders' equity. Thus the use of debt can improve ROE, albeit along with extra risk in the case of stormy weather, metaphorically speaking.

Combining Ritamix Global's Debt And Its 7.4% Return On Equity

Ritamix Global is free of net debt, which is a positive for shareholders. So although its ROE isn't that impressive, we shouldn't judge it harshly on that metric, because it didn't use debt. At the end of the day, when a company has zero debt, it is in a better position to take future growth opportunities.

Conclusion

Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. Companies that can achieve high returns on equity without too much debt are generally of good quality. All else being equal, a higher ROE is better.

Having said that, while ROE is a useful indicator of business quality, you'll have to look at a whole range of factors to determine the right price to buy a stock. It is important to consider other factors, such as future profit growth -- and how much investment is required going forward. Check the past profit growth by Ritamix Global by looking at this visualization of past earnings, revenue and cash flow.

Of course Ritamix Global may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.

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