ANTA Sports Products Limited's (HKG:2020) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

By
Simply Wall St
Published
October 03, 2021
SEHK:2020
Source: Shutterstock

ANTA Sports Products (HKG:2020) has had a rough three months with its share price down 17%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study ANTA Sports Products' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for ANTA Sports Products

How To Calculate Return On Equity?

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 ANTA Sports Products is:

27% = CN¥7.9b ÷ CN¥29b (Based on the trailing twelve months to June 2021).

The 'return' is the profit over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.27 in profit.

Why Is ROE Important For 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. 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.

A Side By Side comparison of ANTA Sports Products' Earnings Growth And 27% ROE

To begin with, ANTA Sports Products has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 7.7% also doesn't go unnoticed by us. Under the circumstances, ANTA Sports Products' considerable five year net income growth of 21% was to be expected.

When you consider the fact that the industry earnings have shrunk at a rate of 4.6% in the same period, the company's net income growth is pretty remarkable.

past-earnings-growth
SEHK:2020 Past Earnings Growth October 4th 2021

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for 2020? You can find out in our latest intrinsic value infographic research report.

Is ANTA Sports Products Using Its Retained Earnings Effectively?

ANTA Sports Products has a three-year median payout ratio of 31% (where it is retaining 69% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like ANTA Sports Products is reinvesting its earnings efficiently.

Additionally, ANTA Sports Products has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 66% over the next three years. Still, forecasts suggest that ANTA Sports Products' future ROE will rise to 43% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Summary

On the whole, we feel that ANTA Sports Products' performance has been quite good. 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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.