Stock Analysis

Is HiTech Group Australia Limited's (ASX:HIT) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

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ASX:HIT
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HiTech Group Australia's (ASX:HIT) stock is up by a considerable 36% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study HiTech Group Australia's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for HiTech Group Australia

How To Calculate Return On Equity?

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 HiTech Group Australia is:

48% = AU$3.3m ÷ AU$7.0m (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.48 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned 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. 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 HiTech Group Australia's Earnings Growth And 48% ROE

To begin with, HiTech Group Australia has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 15% which is quite remarkable. This probably laid the groundwork for HiTech Group Australia's moderate 17% net income growth seen over the past five years.

As a next step, we compared HiTech Group Australia's 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 10%.

past-earnings-growth
ASX:HIT Past Earnings Growth January 21st 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 HiTech Group Australia is trading on a high P/E or a low P/E, relative to its industry.

Is HiTech Group Australia Making Efficient Use Of Its Profits?

HiTech Group Australia has a very high three-year median payout ratio of 105% suggesting that the company's shareholders are getting paid from more than just the company's earnings. In spite of this, the company was able to grow its earnings respectably, as we saw above. That being said, the high payout ratio could be worth keeping an eye on in case the company is unable to keep up its current growth momentum. You can see the 3 risks we have identified for HiTech Group Australia by visiting our risks dashboard for free on our platform here.

Besides, HiTech Group Australia has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, it does look like HiTech Group Australia has some positive aspects to its business. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. Up till now, we've only made a short study of the company's growth data. You can do your own research on HiTech Group Australia and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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