Stock Analysis

Could The Market Be Wrong About Khoon Group Limited (HKG:924) Given Its Attractive Financial Prospects?

SEHK:924
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It is hard to get excited after looking at Khoon Group's (HKG:924) recent performance, when its stock has declined 4.4% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Khoon Group's 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Khoon Group

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Khoon Group is:

9.6% = S$3.7m ÷ S$39m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.10.

What Has ROE Got To Do With 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.

A Side By Side comparison of Khoon Group's Earnings Growth And 9.6% ROE

To start with, Khoon Group's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 10%. This certainly adds some context to Khoon Group's moderate 8.2% net income growth seen over the past five years.

Given that the industry shrunk its earnings at a rate of 0.04% in the same period, the net income growth of the company is quite impressive.

past-earnings-growth
SEHK:924 Past Earnings Growth December 23rd 2020

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

Is Khoon Group Using Its Retained Earnings Effectively?

Summary

Overall, we are quite pleased with Khoon Group's performance. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 2 risks we have identified for Khoon Group visit our risks dashboard for free.

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Valuation is complex, but we're helping make it simple.

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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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