With its stock down 6.5% over the past three months, it is easy to disregard Sundart Holdings (HKG:1568). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Sundart Holdings' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Sundart Holdings is:
16% = HK$413m ÷ HK$2.5b (Based on the trailing twelve months to December 2019).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.16 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learnt that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Sundart Holdings' Earnings Growth And 16% ROE
To start with, Sundart Holdings' ROE looks acceptable. Even when compared to the industry average of 14% the company's ROE looks quite decent. Given the circumstances, we can't help but wonder why Sundart Holdings saw little to no growth in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
We then compared Sundart Holdings' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 12% in the same period, which is a bit concerning.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Sundart Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Sundart Holdings Using Its Retained Earnings Effectively?
In spite of a normal three-year median payout ratio of 39% (or a retention ratio of 61%), Sundart Holdings hasn't seen much growth in its earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Our latest analyst data shows that the future payout ratio of the company is expected to drop to 16% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.
On the whole, we do feel that Sundart Holdings has some positive attributes. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Sundart Holdings' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
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