Today I will take a look at CAA Resources Limited's (SEHK:2112) most recent earnings update (30 June 2019) and compare these latest figures against its performance over the past few years, as well as how the rest of the trade distributors industry performed. As an investor, I find it beneficial to assess 2112’s trend over the short-to-medium term in order to gauge whether or not the company is able to meet its goals, and ultimately sustainably grow over time.
Was 2112's recent earnings decline indicative of a tough track record?
2112's trailing twelve-month earnings (from 30 June 2019) of US$2.7m has declined by -15% compared to the previous year.
Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of -2.9%, indicating the rate at which 2112 is growing has slowed down. Why is this? Well, let's look at what's occurring with margins and whether the entire industry is feeling the heat.
In terms of returns from investment, CAA Resources has fallen short of achieving a 20% return on equity (ROE), recording 1.7% instead. Furthermore, its return on assets (ROA) of 2.9% is below the HK Trade Distributors industry of 4.6%, indicating CAA Resources's are utilized less efficiently. However, its return on capital (ROC), which also accounts for CAA Resources’s debt level, has increased over the past 3 years from 7.4% to 7.6%.
What does this mean?
Though CAA Resources's past data is helpful, it is only one aspect of my investment thesis. Usually companies that endure a prolonged period of diminishing earnings are undergoing some sort of reinvestment phase Though if the entire industry is struggling to grow over time, it may be a indicator of a structural shift, which makes CAA Resources and its peers a higher risk investment. I recommend you continue to research CAA Resources to get a more holistic view of the stock by looking at:
- Financial Health: Are 2112’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Valuation: What is 2112 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 2112 is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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