Stock Analysis

Are Robust Financials Driving The Recent Rally In Hung Fook Tong Group Holdings Limited's (HKG:1446) Stock?

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SEHK:1446
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Hung Fook Tong Group Holdings' (HKG:1446) stock is up by a considerable 31% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Hung Fook Tong Group Holdings' ROE.

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.

View our latest analysis for Hung Fook Tong Group Holdings

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Hung Fook Tong Group Holdings is:

9.8% = HK$29m ÷ HK$292m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.10 in profit.

What Has ROE Got To Do With 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Hung Fook Tong Group Holdings' Earnings Growth And 9.8% ROE

At first glance, Hung Fook Tong Group Holdings seems to have a decent ROE. Even when compared to the industry average of 8.4% the company's ROE looks quite decent. This certainly adds some context to Hung Fook Tong Group Holdings' exceptional 42% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Hung Fook Tong Group Holdings' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 3.6% in the same period.

past-earnings-growth
SEHK:1446 Past Earnings Growth March 1st 2021

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. If you're wondering about Hung Fook Tong Group Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hung Fook Tong Group Holdings Efficiently Re-investing Its Profits?

Hung Fook Tong Group Holdings' ' three-year median payout ratio is on the lower side at 22% implying that it is retaining a higher percentage (78%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Hung Fook Tong Group Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.

Conclusion

In total, we are pretty happy with Hung Fook Tong Group Holdings' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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. You can see the 4 risks we have identified for Hung Fook Tong Group Holdings by visiting our risks dashboard for free on our platform here.

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