K W Nelson Interior Design and Contracting Group Limited's (HKG:8411) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

By
Simply Wall St
Published
May 12, 2021
SEHK:8411
Source: Shutterstock

It is hard to get excited after looking at K W Nelson Interior Design and Contracting Group's (HKG:8411) recent performance, when its stock has declined 12% 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. Specifically, we decided to study K W Nelson Interior Design and Contracting Group's ROE in this article.

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.

Check out our latest analysis for K W Nelson Interior Design and Contracting Group

How Is ROE Calculated?

Return on equity 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 K W Nelson Interior Design and Contracting Group is:

12% = HK$17m ÷ HK$142m (Based on the trailing twelve months to December 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$0.12.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of K W Nelson Interior Design and Contracting Group's Earnings Growth And 12% ROE

At first glance, K W Nelson Interior Design and Contracting Group seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 10%. Consequently, this likely laid the ground for the impressive net income growth of 21% seen over the past five years by K W Nelson Interior Design and Contracting Group. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared K W Nelson Interior Design and Contracting 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 15%.

past-earnings-growth
SEHK:8411 Past Earnings Growth May 13th 2021

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. Is K W Nelson Interior Design and Contracting Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is K W Nelson Interior Design and Contracting Group Using Its Retained Earnings Effectively?

K W Nelson Interior Design and Contracting Group's ' three-year median payout ratio is on the lower side at 8.7% implying that it is retaining a higher percentage (91%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Additionally, K W Nelson Interior Design and Contracting Group has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we feel that K W Nelson Interior Design and Contracting Group's performance has been quite good. 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. 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 1 risk we have identified for K W Nelson Interior Design and Contracting 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.
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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.