This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Future Land Development Holdings Limited (HKG:1030).
Future Land Development Holdings Limited (HKG:1030) outperformed the Real Estate Development industry on the basis of its ROE – producing a higher 24.41% relative to the peer average of 9.50% over the past 12 months. Superficially, this looks great since we know that 1030 has generated big profits with little equity capital; however, ROE doesn’t tell us how much 1030 has borrowed in debt. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of 1030’s ROE. View out our latest analysis for Future Land Development Holdings
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) weighs Future Land Development Holdings’s profit against the level of its shareholders’ equity. For example, if the company invests HK$1 in the form of equity, it will generate HK$0.24 in earnings from this. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.
Return on Equity = Net Profit ÷ Shareholders Equity
Returns are usually compared to costs to measure the efficiency of capital. Future Land Development Holdings’s cost of equity is 13.11%. This means Future Land Development Holdings returns enough to cover its own cost of equity, with a buffer of 11.30%. This sustainable practice implies that the company pays less for its capital than what it generates 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:
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover shows how much revenue Future Land Development Holdings can generate with its current asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine Future Land Development Holdings’s debt-to-equity level. The debt-to-equity ratio currently stands at a high 208.52%, meaning the above-average ratio is a result of a large amount of debt.
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Future Land Development Holdings’s above-industry ROE is encouraging, and is also in excess of its cost of equity. With debt capital in excess of equity, ROE may be inflated by the use of debt funding, raising questions over the sustainability of the company’s returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Future Land Development Holdings, I’ve put together three relevant aspects you should further examine:
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Valuation: What is Future Land Development Holdings worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Future Land Development Holdings is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Future Land Development Holdings? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
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.