Is F8 Enterprises (Holdings) Group Limited's (HKG:8347) Recent Price Movement Underpinned By Its Weak Fundamentals?

With its stock down 36% over the past three months, it is easy to disregard F8 Enterprises (Holdings) Group (HKG:8347). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to F8 Enterprises (Holdings) Group's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for F8 Enterprises (Holdings) Group

How Do You Calculate Return On Equity?

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:

2.6% = HK$3.3m ÷ HK$130m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 F8 Enterprises (Holdings) Group's Earnings Growth And 2.6% ROE

It is quite clear that F8 Enterprises (Holdings) Group's ROE is rather low. Even compared to the average industry ROE of 9.5%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 9.1% seen by F8 Enterprises (Holdings) Group over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

However, when we compared F8 Enterprises (Holdings) Group's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 17% in the same period. This is quite worrisome.

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Efficiently Re-investing Its Profits?

Conclusion

Overall, we have mixed feelings about F8 Enterprises (Holdings) Group. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the 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. Our risks dashboard would have the 5 risks we have identified for F8 Enterprises (Holdings) Group.

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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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