Is Ocean One Holding Ltd.'s (HKG:8476) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Ocean One Holding's (HKG:8476) stock increased significantly by 51% over the past three months. 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. Particularly, we will be paying attention to Ocean One Holding's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Ocean One Holding

How To 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 Ocean One Holding is:

17% = HK$42m ÷ HK$242m (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.17 in profit.

What Has ROE Got To Do With 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 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.

Ocean One Holding's Earnings Growth And 17% ROE

To begin with, Ocean One Holding seems to have a respectable ROE. On comparing with the average industry ROE of 9.0% the company's ROE looks pretty remarkable. This probably laid the ground for Ocean One Holding's moderate 20% net income growth seen over the past five years.

As a next step, we compared Ocean One Holding's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 28% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Ocean One Holding is trading on a high P/E or a low P/E, relative to its industry.

Is Ocean One Holding Efficiently Re-investing Its Profits?

Ocean One Holding has a low three-year median payout ratio of 24%, meaning that the company retains the remaining 76% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, Ocean One Holding is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Summary

In total, we are pretty happy with Ocean One Holding's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of 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. To know the 1 risk we have identified for Ocean One Holding visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.