Xinyi Automobile Glass Hong Kong Enterprises Limited's (HKG:8328) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that Xinyi Automobile Glass Hong Kong Enterprises' (HKG:8328) stock increased significantly by 48% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Xinyi Automobile Glass Hong Kong Enterprises' 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 Xinyi Automobile Glass Hong Kong Enterprises

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 Xinyi Automobile Glass Hong Kong Enterprises is:

5.9% = HK$23m ÷ HK$394m (Based on the trailing twelve months to September 2020).

The 'return' is the profit 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$0.06 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Xinyi Automobile Glass Hong Kong Enterprises' Earnings Growth And 5.9% ROE

On the face of it, Xinyi Automobile Glass Hong Kong Enterprises' ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 5.9%, we may spare it some thought. Particularly, the exceptional 52% net income growth seen by Xinyi Automobile Glass Hong Kong Enterprises over the past five years is pretty remarkable. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's 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 Xinyi Automobile Glass Hong Kong Enterprises' 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 6.0% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Xinyi Automobile Glass Hong Kong Enterprises fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Xinyi Automobile Glass Hong Kong Enterprises Using Its Retained Earnings Effectively?

Conclusion

In total, it does look like Xinyi Automobile Glass Hong Kong Enterprises has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Xinyi Automobile Glass Hong Kong Enterprises.

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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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