Is Clifford Modern Living Holdings Limited's(HKG:3686) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Clifford Modern Living Holdings' (HKG:3686) stock increased significantly by 21% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Clifford Modern Living Holdings' ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Clifford Modern Living Holdings

How Do You Calculate Return On Equity?

ROE 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 Clifford Modern Living Holdings is:

22% = CN¥88m ÷ CN¥411m (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.22 in profit.

Why Is ROE Important For 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. 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 Clifford Modern Living Holdings' Earnings Growth And 22% ROE

To begin with, Clifford Modern Living Holdings seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.1%. This certainly adds some context to Clifford Modern Living Holdings' exceptional 26% net income growth seen over the past five years. However, there could also be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Clifford Modern Living Holdings' 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 1.8% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Clifford Modern Living Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Clifford Modern Living Holdings Efficiently Re-investing Its Profits?

The three-year median payout ratio for Clifford Modern Living Holdings is 26%, which is moderately low. The company is retaining the remaining 74%. By the looks of it, the dividend is well covered and Clifford Modern Living Holdings is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While Clifford Modern Living Holdings 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.

Conclusion

On the whole, we feel that Clifford Modern Living Holdings' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 3 risks we have identified for Clifford Modern Living 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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