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 (ASX:HIT) has had a great run on the share market with its stock up by a significant 45% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study HiTech Group Australia's ROE in this article.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for HiTech Group Australia

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for HiTech Group Australia is:

43% = AU$3.1m ÷ AU$7.2m (Based on the trailing twelve months to December 2019).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.43.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of HiTech Group Australia's Earnings Growth And 43% ROE

Firstly, we acknowledge that HiTech Group Australia has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 17% which is quite remarkable. As a result, HiTech Group Australia's exceptional 25% net income growth seen over the past five years, doesn't come as a surprise.

We then performed a comparison between HiTech Group Australia's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 25% in the same period.

ASX:HIT Past Earnings Growth June 26th 2020
ASX:HIT Past Earnings Growth June 26th 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is HiTech Group Australia fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is HiTech Group Australia Efficiently Re-investing Its Profits?

HiTech Group Australia has very a 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 significantly, as we saw above. Although, it could be worth keeping an eye on the high payout ratio as that's a huge risk. To know the 3 risks we have identified for HiTech Group Australia visit our risks dashboard for free.

Moreover, HiTech Group Australia is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.

Summary

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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of HiTech Group Australia's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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