For investors with a long-term horizon, examining earnings trend over time and against industry peers is more insightful than looking at an earnings announcement in one point in time. Investors may find my commentary, albeit very high-level and brief, on China Electronics Huada Technology Company Limited (HKG:85) useful as an attempt to give more color around how China Electronics Huada Technology is currently performing.
How Well Did 85 Perform?
85’s trailing twelve-month earnings (from 30 June 2018) of HK$155.2m has declined by -10.1% 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 6.0%, indicating the rate at which 85 is growing has slowed down. What could be happening here? Well, let’s take a look at what’s transpiring with margins and whether the whole industry is experiencing the hit as well.
Revenue growth over the past few years, has been positive, however, earnings growth has been lagging behind meaning China Electronics Huada Technology has been growing its expenses by a lot more. This harms margins and earnings, and is not a sustainable practice.
Looking at growth from a sector-level, the HK semiconductor industry has been enduring some headwinds over the prior year, leading to an average earnings drop of -5.3%. This is a momentous change, given that the industry has been delivering a positive rate of 9.3%, on average, over the last five years. This growth is a median of profitable companies of 18 Semiconductor companies in HK including Risecomm Group Holdings, BOE Varitronix and Semiconductor Manufacturing International. This means that whatever near-term headwind the industry is experiencing, it’s hitting China Electronics Huada Technology harder than its peers.
In terms of returns from investment, China Electronics Huada Technology has fallen short of achieving a 20% return on equity (ROE), recording 8.1% instead. Furthermore, its return on assets (ROA) of 4.9% is below the HK Semiconductor industry of 5.4%, indicating China Electronics Huada Technology’s are utilized less efficiently. However, its return on capital (ROC), which also accounts for China Electronics Huada Technology’s debt level, has increased over the past 3 years from 4.5% to 6.2%.
What does this mean?
While past data is useful, it doesn’t tell the whole story. In some cases, companies that experience an extended period of reduction in earnings are undergoing some sort of reinvestment phase Though if the whole industry is struggling to grow over time, it may be a indicator of a structural change, which makes China Electronics Huada Technology and its peers a riskier investment. I recommend you continue to research China Electronics Huada Technology to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 85’s future growth? Take a look at our free research report of analyst consensus for 85’s outlook.
- Financial Health: Are 85’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.
- 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 2018. This may not be consistent with full year annual report figures.
To help readers see past 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. For errors that warrant correction please contact the editor at email@example.com.