Did China Resources Phoenix Healthcare Holdings Company Limited (HGK:1515) Create Value For Investors Over The Past Year?

This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between China Resources Phoenix Healthcare Holdings Company Limited (HGK:1515)’s return fundamentals and stock market performance.

China Resources Phoenix Healthcare Holdings Company Limited (HGK:1515) delivered an ROE of 7.67% over the past 12 months, which is relatively in-line with its industry average of 9.33% during the same period. But what is more interesting is whether 1515 can sustain or improve on this level of return. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of 1515's returns. See our latest analysis for China Resources Phoenix Healthcare Holdings

What you must know about ROE

Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. An ROE of 7.67% implies HK$0.077 returned on every HK$1 invested, so the higher the return, the better. If investors diversify their portfolio by industry, they may want to maximise their return in the Healthcare Facilities sector by investing in 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.

Returns are usually compared to costs to measure the efficiency of capital. China Resources Phoenix Healthcare Holdings’s cost of equity is 8.44%. Since China Resources Phoenix Healthcare Holdings’s return does not cover its cost, with a difference of -0.77%, this means its current use of equity is not efficient and not sustainable. Very simply, China Resources Phoenix Healthcare Holdings pays more 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:

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 China Resources Phoenix Healthcare Holdings can make from its asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. We can determine if China Resources Phoenix Healthcare Holdings’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 China Resources Phoenix Healthcare Holdings’s debt-to-equity ratio. Currently the ratio stands at 4.09%, which is very low. This means China Resources Phoenix Healthcare Holdings has not taken on leverage, which could explain its below-average ROE. China Resources Phoenix Healthcare Holdings still has headroom to take on more leverage in order to grow its returns.

Next Steps:

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. China Resources Phoenix Healthcare Holdings’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 China Resources Phoenix Healthcare Holdings’s return with a possible increase should the company decide to increase its debt levels. Although ROE can be a useful metric, it is only a small part of diligent research.

For China Resources Phoenix Healthcare Holdings, I've compiled three key factors you should further examine:

1. 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.
2. Valuation: What is China Resources Phoenix Healthcare 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 China Resources Phoenix Healthcare Holdings is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of China Resources Phoenix Healthcare 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!

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.