U.S. markets closed
  • S&P Futures

    3,914.75
    +11.00 (+0.28%)
     
  • Dow Futures

    31,497.00
    +76.00 (+0.24%)
     
  • Nasdaq Futures

    12,084.75
    +44.25 (+0.37%)
     
  • Russell 2000 Futures

    1,776.00
    +6.20 (+0.35%)
     
  • Crude Oil

    110.55
    +0.98 (+0.89%)
     
  • Gold

    1,824.70
    -0.10 (-0.01%)
     
  • Silver

    21.12
    -0.05 (-0.23%)
     
  • EUR/USD

    1.0575
    -0.0011 (-0.11%)
     
  • 10-Yr Bond

    3.1940
    +0.0690 (+2.21%)
     
  • Vix

    26.95
    -0.28 (-1.03%)
     
  • GBP/USD

    1.2269
    -0.0001 (-0.01%)
     
  • USD/JPY

    135.3890
    -0.0570 (-0.04%)
     
  • BTC-USD

    20,725.21
    -340.95 (-1.62%)
     
  • CMC Crypto 200

    451.07
    -10.73 (-2.32%)
     
  • FTSE 100

    7,258.32
    +49.51 (+0.69%)
     
  • Nikkei 225

    26,921.41
    +50.14 (+0.19%)
     

Based On Its ROE, Is JinkoSolar Holding Co., Ltd. (NYSE:JKS) A High Quality Stock?

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
·3 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Many investors are still learning about the various metrics that can be useful when analysing a stock. This article is for those who would like to learn about Return On Equity (ROE). To keep the lesson grounded in practicality, we'll use ROE to better understand JinkoSolar Holding Co., Ltd. (NYSE:JKS).

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for JinkoSolar Holding

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for JinkoSolar Holding is:

1.9% = CN¥269m ÷ CN¥14b (Based on the trailing twelve months to September 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.02 in profit.

Does JinkoSolar Holding 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. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. If you look at the image below, you can see JinkoSolar Holding has a lower ROE than the average (16%) in the Semiconductor industry classification.

roe
roe

Unfortunately, that's sub-optimal. Although, we think that a lower ROE could still mean that a company has the opportunity to better its returns with the use of leverage, provided its existing debt levels are low. When a company has low ROE but high debt levels, we would be cautious as the risk involved is too high. You can see the 4 risks we have identified for JinkoSolar Holding by visiting our risks dashboard for free on our platform here.

How Does Debt Impact Return On Equity?

Most companies need money -- from somewhere -- to grow their profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. In the first and second cases, the ROE will reflect this use of cash for investment in the business. In the latter case, the debt used for growth will improve returns, but won't affect the total equity. That will make the ROE look better than if no debt was used.

JinkoSolar Holding's Debt And Its 1.9% ROE

JinkoSolar Holding does use a high amount of debt to increase returns. It has a debt to equity ratio of 2.30. The combination of a rather low ROE and significant use of debt is not particularly appealing. Debt does bring extra risk, so it's only really worthwhile when a company generates some decent returns from it.

Summary

Return on equity is one way we can compare its business quality of different companies. A company that can achieve a high return on equity without debt could be considered a high quality business. If two companies have the same ROE, then I would generally prefer the one with less debt.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. It is important to consider other factors, such as future profit growth -- and how much investment is required going forward. So you might want to take a peek at this data-rich interactive graph of forecasts for the company.

Of course JinkoSolar Holding 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St 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. Simply Wall St has no position in any stocks mentioned.