L.K. Technology Holdings Limited's (HKG:558) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

By
Simply Wall St
Published
April 22, 2022
SEHK:558
Source: Shutterstock

L.K. Technology Holdings (HKG:558) has had a rough three months with its share price down 34%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on L.K. Technology Holdings' ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for L.K. Technology 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 L.K. Technology Holdings is:

16% = HK$554m ÷ HK$3.4b (Based on the trailing twelve months to September 2021).

The 'return' is the income the business earned over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.16.

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.

L.K. Technology Holdings' Earnings Growth And 16% ROE

To begin with, L.K. Technology Holdings seems to have a respectable ROE. Especially when compared to the industry average of 9.9% the company's ROE looks pretty impressive. This probably laid the ground for L.K. Technology Holdings' moderate 18% net income growth seen over the past five years.

As a next step, we compared L.K. Technology Holdings' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 18% in the same period.

past-earnings-growth
SEHK:558 Past Earnings Growth April 22nd 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is L.K. Technology Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is L.K. Technology Holdings Making Efficient Use Of Its Profits?

L.K. Technology Holdings has a three-year median payout ratio of 27%, which implies that it retains the remaining 73% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, L.K. Technology Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 13% over the next three years. As a result, the expected drop in L.K. Technology Holdings' payout ratio explains the anticipated rise in the company's future ROE to 20%, over the same period.

Conclusion

In total, we are pretty happy with L.K. Technology Holdings' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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