Golden Faith Group Holdings Limited (HKG:2863) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

By
Simply Wall St
Published
September 10, 2021
SEHK:2863
Source: Shutterstock

Golden Faith Group Holdings (HKG:2863) has had a great run on the share market with its stock up by a significant 15% over the last week. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Golden Faith Group Holdings' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Golden Faith Group Holdings

How Is ROE Calculated?

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 Golden Faith Group Holdings is:

7.6% = HK$21m ÷ HK$273m (Based on the trailing twelve months to March 2021).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.08 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Golden Faith Group Holdings' Earnings Growth And 7.6% ROE

On the face of it, Golden Faith Group Holdings' ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 9.5%, we may spare it some thought. Having said that, Golden Faith Group Holdings' five year net income decline rate was 5.6%. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 0.3% in the same period, we still found Golden Faith Group Holdings' performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

past-earnings-growth
SEHK:2863 Past Earnings Growth September 10th 2021

Earnings growth is a huge factor in stock valuation. 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. 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 Golden Faith Group Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is Golden Faith Group Holdings Efficiently Re-investing Its Profits?

Summary

Overall, we have mixed feelings about Golden Faith Group Holdings. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. 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 3 risks we have identified for Golden Faith Group Holdings.

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