TBK & Sons Holdings Limited's (HKG:1960) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

By
Simply Wall St
Published
May 10, 2020
SEHK:1960

TBK & Sons Holdings (HKG:1960) has had a rough three months with its share price down 18%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on TBK & Sons Holdings' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for TBK & Sons Holdings

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 TBK & Sons Holdings is:

13% = RM19m ÷ RM140m (Based on the trailing twelve months to December 2019).

The 'return' refers to a company's earnings over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.13.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. 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 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.

TBK & Sons Holdings' Earnings Growth And 13% ROE

At first glance, TBK & Sons Holdings seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.8%. This probably laid the ground for TBK & Sons Holdings' moderate 19% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that TBK & Sons Holdings' growth is quite high when compared to the industry average growth of 8.0% in the same period, which is great to see.

SEHK:1960 Past Earnings Growth May 11th 2020
SEHK:1960 Past Earnings Growth May 11th 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is TBK & Sons Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is TBK & Sons Holdings Making Efficient Use Of Its Profits?

TBK & Sons Holdings doesn't pay any dividend, meaning that all of its profits are being reinvested in the business, which explains the fair bit of earnings growth the company has seen.

Summary

Overall, we are quite pleased with TBK & Sons Holdings' performance. 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. 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. Our risks dashboard would have the 3 risks we have identified for TBK & Sons Holdings.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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