Yahoo Finance Can PICC Property and Casualty Company Limited’s (HKG:2328) ROE Continue To Surpass The Industry Average?
This article is intended for those of you who are at the beginning of your investing journey and want a simplistic look at the return on PICC Property and Casualty Company Limited (HKG:2328) stock.
PICC Property and Casualty Company Limited (HKG:2328) outperformed the Property and Casualty Insurance industry on the basis of its ROE – producing a higher 14.88% relative to the peer average of 11.54% over the past 12 months. While the impressive ratio tells us that 2328 has made significant profits from little equity capital, ROE doesn’t tell us if 2328 has borrowed debt to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable 2328’s ROE is. Check out our latest analysis for PICC Property and Casualty
What you must know about ROE
Return on Equity (ROE) is a measure of PICC Property and Casualty’s profit relative to its shareholders’ equity. An ROE of 14.88% implies HK$0.15 returned on every HK$1 invested. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for PICC Property and Casualty, which is 9.57%. Since PICC Property and Casualty’s return covers its cost in excess of 5.31%, its use of equity capital is efficient and likely to be sustainable. Simply put, PICC Property and Casualty pays less for its capital than what it generates in return. ROE can be broken down into three different 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
Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. Asset turnover shows how much revenue PICC Property and Casualty can generate with its current asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since financial leverage can artificially inflate ROE, we need to look at how much debt PICC Property and Casualty currently has. The debt-to-equity ratio currently stands at a low 34.85%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. PICC Property and Casualty’s ROE is impressive relative to the industry average and also covers its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For PICC Property and Casualty, there are three key 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 PICC Property and Casualty 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 PICC Property and Casualty is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of PICC Property and Casualty? 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.
