Is Hilton Food Group plc's (LON:HFG) Stock On A Downtrend As A Result Of Its Poor Financials?
With its stock down 9.1% over the past three months, it is easy to disregard Hilton Food Group (LON:HFG). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Hilton Food Group's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Hilton Food Group
How Is ROE Calculated?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Hilton Food Group is:
6.4% = UK£19m ÷ UK£305m (Based on the trailing twelve months to January 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.06.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of Hilton Food Group's Earnings Growth And 6.4% ROE
On the face of it, Hilton Food Group's ROE is not much to talk about. Next, when compared to the average industry ROE of 8.8%, the company's ROE leaves us feeling even less enthusiastic. As a result, Hilton Food Group reported a very low income growth of 2.5% over the past five years.
We then compared Hilton Food Group's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 11% in the same 5-year period, which is a bit concerning.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for HFG? You can find out in our latest intrinsic value infographic research report.
Is Hilton Food Group Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 61% (that is, the company retains only 39% of its income) over the past three years for Hilton Food Group suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.
In addition, Hilton Food Group has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 55%. Still, forecasts suggest that Hilton Food Group's future ROE will rise to 13% even though the the company's payout ratio is not expected to change by much.
Conclusion
Overall, we would be extremely cautious before making any decision on Hilton Food Group. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
