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
September 13, 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 week. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on K W Nelson Interior Design and Contracting Group's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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

How Do You 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 K W Nelson Interior Design and Contracting Group is:

1.5% = HK$2.1m ÷ HK$143m (Based on the trailing twelve months to June 2021).

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$0.01.

What Is The Relationship Between ROE And 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. 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.

A Side By Side comparison of K W Nelson Interior Design and Contracting Group's Earnings Growth And 1.5% ROE

It is quite clear that K W Nelson Interior Design and Contracting Group's ROE is rather low. Not just that, even compared to the industry average of 10%, the company's ROE is entirely unremarkable. Although, we can see that K W Nelson Interior Design and Contracting Group saw a modest net income growth of 7.9% over the past five years. We reckon that there could be other factors at play here. 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 K W Nelson Interior Design and Contracting Group's reported growth was lower than the industry growth of 12% in the same period, which is not something we like to see.

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

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 K W Nelson Interior Design and Contracting Group is trading on a high P/E or a low P/E, relative to its industry.

Is K W Nelson Interior Design and Contracting Group Making Efficient Use Of Its Profits?

K W Nelson Interior Design and Contracting Group's three-year median payout ratio to shareholders is 9.3% (implying that it retains 91% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, K W Nelson Interior Design and Contracting Group has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, it does look like K W Nelson Interior Design and Contracting Group has some positive aspects to its business. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for K W Nelson Interior Design and Contracting Group visit our risks dashboard for free.

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