Are Robust Financials Driving The Recent Rally In Crystal International Group Limited's (HKG:2232) Stock?

Most readers would already be aware that Crystal International Group's (HKG:2232) stock increased significantly by 11% over the past three months. 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 Crystal International Group's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Crystal International Group

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 Crystal International Group is:

11% = US$119m ÷ US$1.1b (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.11 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Crystal International Group's Earnings Growth And 11% ROE

At first glance, Crystal International Group seems to have a decent ROE. On comparing with the average industry ROE of 6.9% the company's ROE looks pretty remarkable. Probably as a result of this, Crystal International Group was able to see a decent growth of 5.7% over the last five years.

When you consider the fact that the industry earnings have shrunk at a rate of 2.3% in the same period, the company's net income growth is pretty remarkable.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Crystal International Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Crystal International Group Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 31% (implying that the company retains 69% of its profits), it seems that Crystal International Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Crystal International Group is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 27%. Accordingly, forecasts suggest that Crystal International Group's future ROE will be 11% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Crystal International Group's 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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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