Can Hextar Global Berhad (KLSE:HEXTAR) sustain its strong returns?
Many investors are still learning the different metrics that can be useful when analyzing a stock. This article is for those who want to know more about return on equity (ROE). To keep the lesson grounded in practicality, we will use ROE to better understand Hextar Global Berhad (KLSE:HEXTAR).
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for Hextar Global Berhad
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Hextar Global Berhad is:
17% = RM39m ÷ RM228m (Based on trailing twelve months to December 2021).
The “return” is the annual profit. This therefore means that for every MYR1 of its shareholder’s investment, the company generates a profit of MYR0.17.
Does Hextar Global Berhad have a good ROE?
A simple way to determine if a company has a good return on equity is to compare it to the average for its industry. However, this method is only useful as a rough check, as companies differ quite a bit within the same industry classification. As the image below clearly shows, Hextar Global Berhad has a better ROE than the average (8.5%) for the chemical industry.
It’s a good sign. However, keep in mind that a high ROE does not necessarily indicate efficient profit generation. Especially when a company uses high levels of debt to finance its debt, which can increase its ROE, but the high leverage puts the company at risk.
The Importance of Debt to Return on Equity
Most businesses need money – from somewhere – to increase their profits. This money can come from issuing shares, retained earnings or debt. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the use of debt will improve returns, but will not change equity. So using debt can improve ROE, but with the added risk of stormy weather, metaphorically speaking.
Hextar Global Berhad’s debt and its 17% ROE
Hextar Global Berhad uses a high amount of debt to increase returns. Its debt to equity ratio is 1.15. While its ROE is respectable, it’s worth bearing in mind that there’s usually a limit to the amount of debt a company can use. Debt brings additional risk, so it’s only really worth it when a business is generating decent returns.
Return on equity is a way to compare the business quality of different companies. In our books, the highest quality companies have a high return on equity, despite low leverage. If two companies have roughly the same level of debt and one has a higher ROE, I generally prefer the one with a higher ROE.
That said, while ROE is a useful indicator of a company’s quality, you’ll need to consider a whole host of factors to determine the right price to buy a stock. It is important to consider other factors, such as future earnings growth and the amount of investment needed in the future. You might want to take a look at this data-rich interactive chart of the company’s forecast.
Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.