Easy Smart Group Holdings Limited's (HKG:2442) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

Easy Smart Group Holdings' (HKG:2442) stock is up by a considerable 17% over the past month. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Specifically, we decided to study Easy Smart Group Holdings' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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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 Easy Smart Group Holdings is:

6.0% = HK$13m ÷ HK$225m (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.06 in profit.

Check out our latest analysis for Easy Smart Group Holdings

What Has ROE Got To Do With 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Easy Smart Group Holdings' Earnings Growth And 6.0% ROE

At first glance, Easy Smart Group Holdings' ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.8%. But Easy Smart Group Holdings saw a five year net income decline of 2.5% over the past five years. Bear in mind, the company does have a slightly low ROE. Therefore, the decline in earnings could also be the result of this.

However, when we compared Easy Smart Group Holdings' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 0.5% in the same period. This is quite worrisome.

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. Has the market priced in the future outlook for 2442? You can find out in our latest intrinsic value infographic research report

Is Easy Smart Group Holdings Making Efficient Use Of Its Profits?

Easy Smart Group Holdings' very high three-year median payout ratio of 285% over the last three years suggests that the company is paying its shareholders more than what it is earning and this explains the company's shrinking earnings. Paying a dividend beyond their means is usually not viable over the long term. To know the 3 risks we have identified for Easy Smart Group Holdings visit our risks dashboard for free.

In addition, Easy Smart Group Holdings only recently started paying a dividend so the management probably decided the shareholders prefer dividends even though earnings have been shrinking.

Summary

Overall, we would be extremely cautious before making any decision on Easy Smart Group Holdings. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. 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 Easy Smart Group Holdings' 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.