BOSA Technology Holdings Limited's (HKG:8140) Stock Is Going Strong: Is the Market Following Fundamentals?

By
Simply Wall St
Published
February 23, 2022
SEHK:8140
Source: Shutterstock

BOSA Technology Holdings (HKG:8140) has had a great run on the share market with its stock up by a significant 11% over the last week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on BOSA Technology Holdings' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for BOSA Technology Holdings

How Is ROE Calculated?

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 BOSA Technology Holdings is:

21% = HK$24m ÷ HK$115m (Based on the trailing twelve months to December 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$0.21.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

BOSA Technology Holdings' Earnings Growth And 21% ROE

At first glance, BOSA Technology Holdings seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 10%. This certainly adds some context to BOSA Technology Holdings' exceptional 79% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that BOSA Technology Holdings' growth is quite high when compared to the industry average growth of 22% in the same period, which is great to see.

past-earnings-growth
SEHK:8140 Past Earnings Growth February 23rd 2022

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is BOSA Technology Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is BOSA Technology Holdings Making Efficient Use Of Its Profits?

BOSA Technology Holdings doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Summary

Overall, we are quite pleased with BOSA 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. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 3 risks we have identified for BOSA Technology Holdings by visiting our risks dashboard for free on our platform here.

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