Original address: liu-hang.cn/2019/08/10/…
ROE
ROE is the abbreviation Of Return Of Equity. In Chinese, it means Return on Equity, also known as Return on Equity, Return on Equity and the most commonly used Return on Equity.
Return on equity is a measure of the return on investment relative to shareholders’ equity. It reflects the ability of a company to generate net profit by using its net asset value. The easiest way to think about it is this: if the ROE is 30%, the company can generate a net profit of 30 cents for every dollar invested by the investor.
Roe is divided into fully diluted ROE and weighted average ROE
A formula to calculate
The most commonly used basic calculation formula is:
Return on equity = Net profit/net assets
Fully diluted return on equity
Fully diluted return on equity = net profit during reporting period/net assets at the end of reporting period
Weighted average return on equity
Weighted average return on equity = P/(E0 + NP / 2 + Ei * Mi/m0-EJ * Mj/M0)
P - Profit in the reporting period; NP - Net profit during the reporting period; E0 - Initial net assets; Ei - New net assets such as issuance of new shares or debt-equity swap during reporting period; Ej - Decrease of net assets such as repurchase or cash dividend during reporting period; M0 - number of months of reporting period; Mi - the number of new net assets from the next January to the end of the reporting period; Mj - The number of months from the next month of net asset reduction to the end of the reporting period.Copy the codeAnalysis method
Dupont formula
The most commonly used analysis method is The Dupont formula:
Return on Equity = Net interest rate on sales * Total asset turnover * leverage ratio
Net profit margin on sales = net profit/sales revenue
Total asset turnover = sales revenue/total assets
Leverage ratio = total assets/net assets
Return on Equity = (Net profit/sales revenue) * (Sales revenue/Total assets) * (Total assets/Net assets)
The instance
Taking the change of ROE in 2018 compared with ROE in 2017 driven by Jiechang as an example, the DuPont formula was adopted to analyze the reasons for the change:
| project | In 2017, | In 2018, | change |
|---|---|---|---|
| ROE | 30.62% | 16.04% | – 14.58% |
| Net operating interest rate | 22.72% | 22.75% | 0.03% |
| Total asset turnover | 0.98 | 0.58 | 0.4 |
| Leverage ratio | 1.37 | 1.21 | 0.16 |
There will be some errors in the calculation process due to the retention accuracy problem, so all use ~=, there is no need to force accurate results
The influence of operating net interest rate on ROE changes is :(22.75%-22.72%) 0.981.37-16.04% ~= 0.04%
The influence of total asset turnover on ROE is 22.75%* (0.58-0.98) *1.37 ~= -12.45%
Leverage ratio has an impact on ROE: 22.75%0.58 (1.21-1.37) ~= -2.11%
(0.04% + -12.45% + -2.11%) ~= -14.58%
According to the analysis, jEChang’s ROE in 2018 decreased by 14.58% compared with 2017 mainly because of changes in total asset turnover and leverage ratio.
This is the first-level dismantling of ROE, and the general reasons for the changes can be obtained, but the specific reasons need to be further checked, which requires a second-level dismantling.
Net operating interest rate
Net profit rate = gross profit rate – sales expense ratio – management expense ratio – R&D expense ratio – Financial expense ratio – Other expense ratio – Tax rate
Effect of net operating margin on ROE change: 0.03%
| project | In 2017, | In 2018, | change | impact |
|---|---|---|---|---|
| Gross margin = (Total operating revenue – operating costs)/Total operating revenue | 44.95% | 42.06% | – 2.89% | -2.89%* (0.04%/0.03%) ~= 3.85% |
| Sales expense ratio = sales expense/total operating revenue | 7.73% | 6.37% | – 1.36% | ~= -1.74% |
| Administrative expense ratio = administrative expense/total operating income | 5.34% | 5.38% | 0.04% | ~ = 0.05% |
| R&d expense ratio = R&D expense/gross operating income | 4.47% | 4.42% | – 0.05% | ~= -0.07% |
| Financial expense ratio = financial expense/total operating income | 0.82% | – 0.87% | – 1.69% | ~= -2.25% |
Total asset turnover
Total asset turnover days = 360 / Total asset turnover rate
Change in total asset turnover days: 360/0.58-360/0.98 = 253.34 Impact of total asset turnover rate on ROE change: -12.45%
| project | In 2017, | In 2018, | change | impact |
|---|---|---|---|---|
| Days of turnover of notes receivable and accounts receivable | 29.28 | 41.27 | 11.99 | 11.99* (-12.45%/253.34) ~= -0.59% |
| Inventory turnover days | 47.38 | 63.21 | 15.83 | – 0.78% |
| Turnover days of fixed assets | 99.96 | 88.98 | 10.98 | 0.54% |
| Turnover days of construction in progress | 5.24 | 7.82 | 2.58 | – 0.13% |
| Turnover days of other assets | 185.11 | 417.20 | 232.09 | – 11.04% |
Leverage ratio
Leverage ratio = Total assets/Net assets = (Net assets + Total liabilities)/Net assets Liabilities = current liabilities + non-current liabilities = financial liabilities + operating liabilities
Leverage impact on ROE: -2.11%
| project | In 2017, | In 2018, | change | impact |
|---|---|---|---|---|
| Current liabilities/net assets | 0.36 | 0.21 | 0.15 | -2.11%/ (-0.15+-0.01) *-0.15 ~= -1.98% |
| Non-current liabilities/net assets | 0.01 | 0.00 | 0.01 | -2.11% – -1.98% ~= -0.13% |
| Financial liabilities/net assets | 0.11 | 0.19 | 0.08 | -2.11%/ (0.08+ -0.24) *0.08 ~= 1.06% |
| Operating liabilities/net assets | 0.26 | 0.02 | 0.24 | – 2.11% – 1.06% ~ = 3.17% |
conclusion
According to further disassembly analysis, it is concluded that:
1. The increase of turnover days of other assets was the main reason for the ROE decrease in 2018. 2
defects
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In the calculation of return on equity, the numerator is net profit and the denominator is net asset. Since the net profit of an enterprise is not only generated by net asset, the calculation of the numerator and denominator is not consistent, which is logically unreasonable.
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The rate of return on net assets can reflect the income level of net assets (equity capital) of an enterprise, but it cannot fully reflect the capital utilization ability of an enterprise. The principle is very obvious. The index that fully reflects the overall effect of an enterprise’s capital operation should be the return on total assets, rather than the return on net assets. The so-called return on total assets is calculated by the following formula: Ten owners’ equity net present total assets (debt) x 100% compare it with the difference between the return on net assets, only is the denominator of the calculation, the calculation of net assets yield the denominator is the net assets, return on total assets of the denominator is calculated by total assets, so molecular denominator comparable, in calculating diameter is consistent.
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There are many limitations in assessing the effect of capital utilization by roe. (1) Earnings per share and return on equity indicators are not highly complementary. Because the assets scale of listed companies is not equal, the absolute income index of each enterprise can not be used to evaluate its efficiency and management level. Evaluation criteria, earnings per share and net assets yield is mainly two relative indicators, however, earnings per share is mainly evaluation enterprise equity capital usage, although return on equity of slightly larger net worth (including equity, capital reserves, surplus reserves, undistributed profit), but only to reflect the enterprise equity funds usage, Obviously, it is necessary to adjust and perfect the design of evaluation index system. (2) Taking roe as assessment index is not conducive to horizontal comparison of enterprises. Due to the difference of the debt ratio of enterprises, for example, some enterprises have excessively high debt, leading to the high roe of some small profit enterprises, and even meet the requirements of rights offering, while some enterprises, despite good benefits, due to reasonable financial structure, low debt, low ROE, and may not meet the requirements of rights offering. (3) Assessment of roe index is not conducive to longitudinal comparative analysis of enterprises. Enterprises can improve earnings per share and return on net assets by means of repurchasing equity with debt, but in fact, the economic efficiency and capital utilization effect of the enterprise are not improved. Take “Yantianhua”, a listed company that carried out the repurchase of state-owned shares in 2000, for example, the total profit and net profit of the company in 2000 decreased by 33.66% and 36.58% respectively compared with 1999. However, due to the repurchase of 200 million state-owned shares in that year, the earnings per share and return on net assets decreased by only 0.01 yuan and 2.33% respectively. The declines were only 2% and 13%, respectively. Such assessment results will undoubtedly have a negative impact on investors’ decisions. By on as you can see, in order to return on equity index as evaluation standard of enterprise financing again, disease, and use the total return on assets appraisal, compared with much more reasonable, on the one hand can properly reflect the utilization effect of enterprise funds to help investors to make the right investment decisions, also can avoid to a certain extent, enterprise standard play “Numbers game”. Therefore, it is necessary to evaluate the utility of capital utilization, guide the reasonable flow of social resources, make capital flow to enterprises with high economic benefits, and restrain the impulse of financing of enterprises, so that the rate of return on total assets should be used as the assessment standard of allotment and additional issuance.
The data comes fromForrest Gump voting, analysis results do not constitute a purchase recommendation
reference
- Return on equity
- ROE
- Information Disclosure and Reporting Rules for Publicly Issued Securities Companies No. 9 — Calculation and Disclosure of Return on Net Assets and Earnings per Share (CSRC Announcement [2010] No. 2, revised on January 11, 2010)