Is Travel Expert (Asia) Enterprises Limited's (HKG:1235) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Travel Expert (Asia) Enterprises (HKG:1235) has had a great run on the share market with its stock up by a significant 20% over the last 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. In this article, we decided to focus on Travel Expert (Asia) Enterprises' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Travel Expert (Asia) Enterprises

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 Travel Expert (Asia) Enterprises is:

13% = HK$9.0m ÷ HK$69m (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.13 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Travel Expert (Asia) Enterprises' Earnings Growth And 13% ROE

To begin with, Travel Expert (Asia) Enterprises seems to have a respectable ROE. Especially when compared to the industry average of 6.8% the company's ROE looks pretty impressive. This certainly adds some context to Travel Expert (Asia) Enterprises' exceptional 37% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Travel Expert (Asia) Enterprises' growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Travel Expert (Asia) Enterprises''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Travel Expert (Asia) Enterprises Making Efficient Use Of Its Profits?

Travel Expert (Asia) Enterprises has a three-year median payout ratio of 40% (where it is retaining 60% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Travel Expert (Asia) Enterprises is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Travel Expert (Asia) Enterprises has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Travel Expert (Asia) Enterprises' 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 substantial 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 3 risks we have identified for Travel Expert (Asia) Enterprises 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.