Health and Happiness (H&H) International Holdings Limited's (HKG:1112) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

By
Simply Wall St
Published
February 23, 2022
SEHK:1112
Source: Shutterstock

Health and Happiness (H&H) International Holdings (HKG:1112) has had a rough three months with its share price down 21%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Health and Happiness (H&H) International Holdings' 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Health and Happiness (H&H) International Holdings

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 Health and Happiness (H&H) International Holdings is:

14% = CN¥920m ÷ CN¥6.4b (Based on the trailing twelve months to June 2021).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.14 in profit.

Why Is ROE Important For 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 Health and Happiness (H&H) International Holdings' Earnings Growth And 14% ROE

To begin with, Health and Happiness (H&H) International Holdings seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 11%. Despite this, Health and Happiness (H&H) International Holdings' five year net income growth was quite low averaging at only 4.8%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Health and Happiness (H&H) International Holdings' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 10% in the same period.

past-earnings-growth
SEHK:1112 Past Earnings Growth February 23rd 2022

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Health and Happiness (H&H) International Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Health and Happiness (H&H) International Holdings Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 45% (implying that the company retains the remaining 55% of its income), Health and Happiness (H&H) International Holdings' earnings growth was quite low. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Health and Happiness (H&H) International Holdings has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 42% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 17%.

Conclusion

In total, it does look like Health and Happiness (H&H) International Holdings has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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