Are F8 Enterprises (Holdings) Group Limited's (HKG:8347) Mixed Financials Driving The Negative Sentiment?

With its stock down 46% over the past three months, it is easy to disregard F8 Enterprises (Holdings) Group (HKG:8347). It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Specifically, we decided to study F8 Enterprises (Holdings) Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for F8 Enterprises (Holdings) Group

How To 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 F8 Enterprises (Holdings) Group is:

2.4% = HK$3.1m ÷ HK$130m (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.02 in profit.

Why Is ROE Important For Earnings Growth?

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

F8 Enterprises (Holdings) Group's Earnings Growth And 2.4% ROE

It is quite clear that F8 Enterprises (Holdings) Group's ROE is rather low. Even when compared to the industry average of 9.5%, the ROE figure is pretty disappointing. For this reason, F8 Enterprises (Holdings) Group's five year net income decline of 9.8% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

So, as a next step, we compared F8 Enterprises (Holdings) Group's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 17% in the same period.

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). 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 F8 Enterprises (Holdings) Group is trading on a high P/E or a low P/E, relative to its industry.

Is F8 Enterprises (Holdings) Group Using Its Retained Earnings Effectively?

Summary

On the whole, we feel that the performance shown by F8 Enterprises (Holdings) Group can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 5 risks we have identified for F8 Enterprises (Holdings) 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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