Could The Market Be Wrong About Taste Gourmet Group Limited (HKG:8371) Given Its Attractive Financial Prospects?

By
Simply Wall St
Published
January 19, 2022
SEHK:8371
Source: Shutterstock

It is hard to get excited after looking at Taste Gourmet Group's (HKG:8371) recent performance, when its stock has declined 21% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Taste Gourmet Group's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Taste Gourmet Group

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 Taste Gourmet Group is:

27% = HK$45m ÷ HK$168m (Based on the trailing twelve months to September 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$0.27.

What Has ROE Got To Do With 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 Taste Gourmet Group's Earnings Growth And 27% ROE

Firstly, we acknowledge that Taste Gourmet Group has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 6.1% also doesn't go unnoticed by us. So, the substantial 29% net income growth seen by Taste Gourmet Group over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Taste Gourmet Group compares quite favourably to the industry average, which shows a decline of 11% in the same period.

past-earnings-growth
SEHK:8371 Past Earnings Growth January 19th 2022

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). This then helps them determine if the stock is placed for a bright or bleak future. 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 Taste Gourmet Group is trading on a high P/E or a low P/E, relative to its industry.

Is Taste Gourmet Group Efficiently Re-investing Its Profits?

Taste Gourmet Group's three-year median payout ratio is a pretty moderate 43%, meaning the company retains 57% of its income. So it seems that Taste Gourmet Group is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Taste Gourmet Group has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Taste Gourmet Group'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 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 4 risks we have identified for Taste Gourmet Group by visiting our risks dashboard for free on our platform here.

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