Taste Gourmet Group Limited's (HKG:8371) Stock Is Going Strong: Is the Market Following Fundamentals?

Taste Gourmet Group (HKG:8371) has had a great run on the share market with its stock up by a significant 21% 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. Particularly, we will be paying attention to Taste Gourmet Group's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Taste Gourmet Group

How Do You 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 Taste Gourmet Group is:

25% = HK$30m ÷ HK$121m (Based on the trailing twelve months to March 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.25.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learnt 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.

Taste Gourmet Group's Earnings Growth And 25% ROE

To begin with, Taste Gourmet Group has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 6.5% also doesn't go unnoticed by us. Under the circumstances, Taste Gourmet Group's considerable five year net income growth of 45% was to be expected.

As a next step, we compared Taste Gourmet Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 6.2%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Making Efficient Use Of Its Profits?

Taste Gourmet Group's three-year median payout ratio is a pretty moderate 43%, meaning the company retains 57% of its income. By the looks of it, the dividend is well covered and Taste Gourmet Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While Taste Gourmet Group has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Summary

Overall, we are quite pleased with Taste Gourmet Group's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 3 risks we have identified for Taste Gourmet Group visit our risks dashboard for free.

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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. Thank you for reading.