Metric analysis

Should Angelalign Technology Inc. (HKG: 6699) focus on improving this fundamental metric?

Many investors are still educating themselves about the various metrics that can be useful when analyzing a stock. This article is for those who want to learn more about return on equity (ROE). We’ll use the ROE to take a look at Angelalign Technology Inc. (HKG: 6699), using a real-world example.

Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.

Check out our latest review for Angelalign technology

How is the ROE calculated?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE of Angelalign technology is:

6.6% = CN ¥ 185m CN ¥ 2.8b (Based on the last twelve months to June 2021).

The “return” is the amount earned after tax over the past twelve months. So this means that for every HK $ 1 invested by its shareholder, the company generates a profit of HK $ 0.07.

Does Angelalign technology have a good ROE?

An easy way to determine if a company has a good return on equity is to compare it to the average in its industry. However, this method is only useful as a rough check, as companies differ a lot within a single industry classification. As shown in the graph below, Angelalign Technology has a lower than average ROE (12%) for the medical equipment industry classification.

SEHK: 6699 Return on equity December 7, 2021

It is certainly not ideal. However, a low ROE is not always bad. If the company’s debt levels are moderate to low, there is still a chance that returns can be improved through the use of financial leverage. A highly leveraged business with a low ROE is a whole different story and a risky investment on our books.

Why You Should Consider Debt When Looking At ROE

Businesses generally need to invest money to increase their profits. The money for the investment can come from the profits of the previous year (retained earnings), from the issuance of new shares or from loans. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt used for growth will improve returns, but will not affect total equity. In this way, the use of debt will increase the ROE, even if the basic economy of the business remains the same.

Angelalign Technology’s debt and its ROE of 6.6%

A positive point for shareholders is that Angelalign Technology has no net debt! So while his ROE isn’t that impressive, we shouldn’t judge him harshly on this metric because he hasn’t used debt. After all, with cash on the balance sheet, a business has many more options in good times and in bad times.

Summary

Return on equity is useful for comparing the quality of different companies. A business that can earn a high return on equity without going into debt can be considered a high quality business. If two companies have roughly the same level of debt to equity and one has a higher ROE, I would generally prefer the one with a higher ROE.

But when a company is of high quality, the market often offers it up to a price that reflects that. It is important to take into account other factors, such as future profit growth and the amount of investment required for the future. So I think it’s worth checking this out free analyst forecast report for the company.

Sure Angelalign technology might not be the best stock to buy. So you might want to see this free collection of other companies with high ROE and low leverage.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.