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What You Must Know About China HGS Real Estate Inc’s (NASDAQ:HGSH) 1.93% ROE

China HGS Real Estate Inc (NASDAQ:HGSH) generated a below-average return on equity of 1.93% in the past 12 months, while its industry returned 9.15%. Though HGSH’s recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on HGSH’s below-average returns. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of HGSH’s returns. Check out our latest analysis for China HGS Real Estate

Breaking down Return on Equity

Return on Equity (ROE) is a measure of China HGS Real Estate’s profit relative to its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.

Return on Equity = Net Profit ÷ Shareholders Equity

Returns are usually compared to costs to measure the efficiency of capital. China HGS Real Estate’s cost of equity is 15.47%. Given a discrepancy of -13.54% between return and cost, this indicated that China HGS Real Estate may be paying more for its capital than what it’s generating in return. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

NasdaqCM:HGSH Last Perf Dec 21st 17
NasdaqCM:HGSH Last Perf Dec 21st 17

The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover reveals how much revenue can be generated from China HGS Real Estate’s asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since financial leverage can artificially inflate ROE, we need to look at how much debt China HGS Real Estate currently has. At 81.45%, China HGS Real Estate’s debt-to-equity ratio appears sensible and indicates its ROE is generated from its capacity to increase profit without a large debt burden.

NasdaqCM:HGSH Historical Debt Dec 21st 17
NasdaqCM:HGSH Historical Debt Dec 21st 17

What this means for you:

Are you a shareholder? HGSH’s below-industry ROE is disappointing, furthermore, its returns were not even high enough to cover its own cost of equity. Since its existing ROE is not fuelled by unsustainable debt, investors shouldn’t give up as HGSH still has capacity to improve shareholder returns by borrowing to invest in new projects in the future. If you’re looking for new ideas for high-returning stocks, you should take a look at our free platform to see the list of stocks with Return on Equity over 20%.

Are you a potential investor? If HGSH has been on your watch list for a while, making an investment decision based on ROE alone is unwise. I recommend you do additional fundamental analysis by looking through our most recent infographic report on China HGS Real Estate to help you make a more informed investment decision.


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.

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