Plover Bay Technologies (HKG:1523) has had a great run on the share market with its stock up by a significant 5.2% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Plover Bay Technologies’ ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.
How Is ROE Calculated?
Return on equity 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 Plover Bay Technologies is:
35% = US$12m ÷ US$34m (Based on the trailing twelve months to December 2019).
The ‘return’ is the income the business earned over the last year. That means that for every HK$1 worth of shareholders’ equity, the company generated HK$0.35 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. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
Plover Bay Technologies’ Earnings Growth And 35% ROE
To begin with, Plover Bay Technologies has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 5.2% the company’s ROE is quite impressive. So, the substantial 27% net income growth seen by Plover Bay Technologies over the past five years isn’t overly surprising.
As a next step, we compared Plover Bay Technologies’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 3.9%.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Plover Bay Technologies is trading on a high P/E or a low P/E, relative to its industry.
Is Plover Bay Technologies Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 89% (implying that it keeps only 11% of profits) for Plover Bay Technologies suggests that the company’s growth wasn’t really hampered despite it returning most of the earnings to its shareholders.
Moreover, Plover Bay Technologies is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 75%. As a result, Plover Bay Technologies’ ROE is not expected to change by much either, which we inferred from the analyst estimate of 41% for future ROE.
In total, we are pretty happy with Plover Bay Technologies’ performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that’s probably a good sign. So far, we’ve only made a quick discussion around the company’s earnings growth. So it may be worth checking this free detailed graph of Plover Bay Technologies’ past earnings, as well as revenue and cash flows to get a deeper insight into the company’s performance.
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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. 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.
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