Huazhong In-Vehicle Holdings Company Limited (HKG:6830) Has Varied Financials: Could That Be Why Its Recent Performance Has Been Uneventful?

Huazhong In-Vehicle Holdings' (HKG:6830) stock was mostly flat over the past week. We decided to study the company's financials, which appear to be inconsistent, to assess what this could mean for future share prices as markets tend to be aligned with a company's long-term fundamentals. Specifically, we decided to study Huazhong In-Vehicle Holdings' 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Huazhong In-Vehicle Holdings

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 Huazhong In-Vehicle Holdings is:

5.6% = CN¥60m ÷ CN¥1.1b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.06 in profit.

What Is The Relationship Between ROE And 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. 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 Huazhong In-Vehicle Holdings' Earnings Growth And 5.6% ROE

At first glance, Huazhong In-Vehicle Holdings' ROE doesn't look very promising. Next, when compared to the average industry ROE of 8.5%, the company's ROE leaves us feeling even less enthusiastic. Accordingly, Huazhong In-Vehicle Holdings' low net income growth of 3.4% over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Huazhong In-Vehicle Holdings' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 5.2% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Huazhong In-Vehicle Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Huazhong In-Vehicle Holdings Using Its Retained Earnings Effectively?

A low three-year median payout ratio of 9.9% (implying that the company retains the remaining 90% of its income) suggests that Huazhong In-Vehicle Holdings is retaining most of its profits. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Huazhong In-Vehicle Holdings has been paying dividends over a period of nine years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

On the whole, we feel that the performance shown by Huazhong In-Vehicle Holdings can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for Huazhong In-Vehicle Holdings.

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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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