Sinotruk (Hong Kong) Limited (HKG:3808) Has Fared Decently But Fundamentals Look Uncertain: What Lies Ahead For The Stock?

Sinotruk (Hong Kong)'s (HKG:3808) stock is up by 9.0% over the past three months. However, we decided to study the company's mixed-bag of fundamentals to assess what this could mean for future share prices, as stock prices tend to be aligned with a company's long-term financial performance. Specifically, we decided to study Sinotruk (Hong Kong)'s ROE in this article.

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 Sinotruk (Hong Kong)

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Sinotruk (Hong Kong) is:

6.9% = CN¥3.1b ÷ CN¥45b (Based on the trailing twelve months to June 2023).

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$0.07 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Sinotruk (Hong Kong)'s Earnings Growth And 6.9% ROE

At first glance, Sinotruk (Hong Kong)'s ROE doesn't look very promising. However, its ROE is similar to the industry average of 7.3%, so we won't completely dismiss the company. But then again, Sinotruk (Hong Kong)'s five year net income shrunk at a rate of 8.1%. Remember, the company's ROE is a bit low to begin with. Hence, this goes some way in explaining the shrinking earnings.

However, when we compared Sinotruk (Hong Kong)'s growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 7.7% in the same period. This is quite worrisome.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Sinotruk (Hong Kong) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sinotruk (Hong Kong) Using Its Retained Earnings Effectively?

Looking at its three-year median payout ratio of 35% (or a retention ratio of 65%) which is pretty normal, Sinotruk (Hong Kong)'s declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Moreover, Sinotruk (Hong Kong) has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 33%. Still, forecasts suggest that Sinotruk (Hong Kong)'s future ROE will rise to 12% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we're a bit ambivalent about Sinotruk (Hong Kong)'s performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.