Is Weakness In Prinx Chengshan (Cayman) Holding Limited (HKG:1809) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Prinx Chengshan (Cayman) Holding (HKG:1809) has had a rough week with its share price down 6.1%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Prinx Chengshan (Cayman) Holding's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Prinx Chengshan (Cayman) Holding

How To Calculate Return On Equity?

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 Prinx Chengshan (Cayman) Holding is:

13% = CN¥484m ÷ CN¥3.6b (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Prinx Chengshan (Cayman) Holding's Earnings Growth And 13% ROE

At first glance, Prinx Chengshan (Cayman) Holding seems to have a decent ROE. Especially when compared to the industry average of 8.5% the company's ROE looks pretty impressive. Probably as a result of this, Prinx Chengshan (Cayman) Holding was able to see a decent growth of 17% over the last five years.

We then compared Prinx Chengshan (Cayman) Holding's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 5.2% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 Prinx Chengshan (Cayman) Holding fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Prinx Chengshan (Cayman) Holding Efficiently Re-investing Its Profits?

In Prinx Chengshan (Cayman) Holding's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 24% (or a retention ratio of 76%), which suggests that the company is investing most of its profits to grow its business.

While Prinx Chengshan (Cayman) Holding has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 24% of its profits over the next three years. However, Prinx Chengshan (Cayman) Holding's ROE is predicted to rise to 20% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we feel that Prinx Chengshan (Cayman) Holding's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 2 risks we have identified for Prinx Chengshan (Cayman) Holding visit our risks dashboard for free.

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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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