Is Sun.King Technology Group Limited's (HKG:580) Recent Price Movement Underpinned By Its Weak Fundamentals?

By
Simply Wall St
Published
January 21, 2022
SEHK:580
Source: Shutterstock

It is hard to get excited after looking at Sun.King Technology Group's (HKG:580) recent performance, when its stock has declined 32% over the past three months. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Sun.King Technology Group's ROE today.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Sun.King Technology Group

How Is ROE Calculated?

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 Sun.King Technology Group is:

4.4% = CN¥76m ÷ CN¥1.7b (Based on the trailing twelve months to June 2021).

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$0.04 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Sun.King Technology Group's Earnings Growth And 4.4% ROE

On the face of it, Sun.King Technology Group's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 13% either. Hence, the flat earnings seen by Sun.King Technology Group over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Sun.King Technology Group's reported growth was lower than the industry growth of 15% in the same period, which is not something we like to see.

past-earnings-growth
SEHK:580 Past Earnings Growth January 21st 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Sun.King Technology Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sun.King Technology Group Using Its Retained Earnings Effectively?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

Overall, we have mixed feelings about Sun.King Technology Group. 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. Up till now, we've only made a short study of the company's growth data. You can do your own research on Sun.King Technology Group and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.