ManpowerGroup Greater China Limited's (HKG:2180) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that ManpowerGroup Greater China's (HKG:2180) stock increased significantly by 19% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on ManpowerGroup Greater China's 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for ManpowerGroup Greater China

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for ManpowerGroup Greater China is:

11% = CN¥136m ÷ CN¥1.2b (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$0.11.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

ManpowerGroup Greater China's Earnings Growth And 11% ROE

To begin with, ManpowerGroup Greater China seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 13%. This certainly adds some context to ManpowerGroup Greater China's moderate 18% net income growth seen over the past five years.

Given that the industry shrunk its earnings at a rate of 29% in the same period, the net income growth of the company is quite impressive.

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 2180 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is ManpowerGroup Greater China Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 38% (implying that the company retains 62% of its profits), it seems that ManpowerGroup Greater China is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

While ManpowerGroup Greater China has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 45%. Still, forecasts suggest that ManpowerGroup Greater China's future ROE will rise to 15% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we are quite pleased with ManpowerGroup Greater China'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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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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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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