Does The Market Have A Low Tolerance For F8 Enterprises (Holdings) Group Limited's (HKG:8347) Mixed Fundamentals?

By
Simply Wall St
Published
May 24, 2021
SEHK:8347
Source: Shutterstock

It is hard to get excited after looking at F8 Enterprises (Holdings) Group's (HKG:8347) recent performance, when its stock has declined 22% over the past month. 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. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on F8 Enterprises (Holdings) Group's ROE.

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 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 Is ROE Calculated?

The formula for ROE 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 income the business earned over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.02 in profit.

What Is The Relationship Between ROE And 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.

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

As you can see, F8 Enterprises (Holdings) Group's ROE looks pretty weak. Even when compared to the industry average of 8.2%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 9.8% seen by F8 Enterprises (Holdings) Group was possibly a result of it having a 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.

That being said, we compared F8 Enterprises (Holdings) Group's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 20% in the same period.

past-earnings-growth
SEHK:8347 Past Earnings Growth May 25th 2021

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about F8 Enterprises (Holdings) Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is F8 Enterprises (Holdings) Group Making Efficient Use Of Its Profits?

Conclusion

Overall, we have mixed feelings about F8 Enterprises (Holdings) Group. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. 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. You can see the 4 risks we have identified for F8 Enterprises (Holdings) Group by visiting our risks dashboard for free on our platform here.

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