Many investors are still learning about the various indicators that can help them when analyzing stocks. This article is for those who want to know about ROE (return on equity). Find out more about Lichen China Limited (NASDAQ:LICN) by examining ROE in a hands-on way.
Return on equity or ROE is an important metric used to assess how efficiently a company’s management is using the company’s capital. In other words, it shows that we have succeeded in turning shareholder investment into profit.
Check out Lichen China’s latest analysis
How to calculate return on equity
Return on equity can be calculated using the following formula:
Return on Equity = Net Income (from Continuing Operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Lichen China is:
23% = US$8.5 million ÷ US$37 million (based on last 12 months to December 2021).
“Yield” is the annual profit. One way he conceptualizes this is that for every $1 of stockholders’ equity held, the company made $0.23 of his profit.
Is Lichen China’s ROE good?
Perhaps the easiest way to assess a company’s ROE is to compare it to the industry average. Importantly, this is far from a perfect scale. This is because companies vary widely within the same industry classification. As you can see from the chart below, Lichen China’s ROE is higher than the professional services industry average (17%).
That’s a good sign. That said, high ROE doesn’t necessarily mean high profitability. A high percentage of debt in a company’s capital structure can also result in a high ROE, and high debt levels can be a significant risk. The risk dashboard should include the two risks he identified for Lichen China.
Why You Should Consider Debt When Looking at ROE
Businesses usually need to invest money in order to make a profit. That cash can come from retained earnings, the issuance of new shares (shares), or debt. For the first and second options, ROE reflects the use of this cash for growth. In the latter case, debt used for growth improves earnings but does not affect total capital. Thus, using debt boosts her ROE even though the core economics of the business remain the same.
Lichen China Debt and Its 23% ROE
Lichen China has a small amount of debt with an equity ratio of only 0.0094, but we consider the use of debt to be very conservative. Looking at the high ROE supported by only a small amount of debt, I think the quality of the business is high. Using debt wisely to improve returns is certainly a good thing, but it does increase risk slightly and reduce future options.
Return on equity is one way in which the quality of business of different companies can be compared. In our book, top quality companies have higher return on equity despite having less debt. If two companies have the same ROE, he usually prefers the one with less debt.
That said, while ROE is a useful indicator of the quality of your business, determining the right price to buy a stock requires consideration of a number of factors. It is important to consider other factors, such as future profit growth. It is also important to consider how much investment will be required in the future.Watch this FREE to see how the company has grown over time Detailed graph Historical Earnings, Earnings, Cash Flows.
of course, You can find great investments by looking elsewhere. Let’s take a look at this freedom A list of interesting companies.
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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price sensitive company announcements or qualitative materials. Is not …
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