Should Weakness in Uni-President China Holdings Ltd's (HKG:220) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 10% over the past month, it is easy to disregard Uni-President China Holdings (HKG:220). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Uni-President China Holdings' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Uni-President China Holdings

How Do You Calculate Return On Equity?

ROE 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 Uni-President China Holdings is:

12% = CN¥1.7b ÷ CN¥13b (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.12.

What Is The Relationship Between ROE And 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. 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.

Uni-President China Holdings' Earnings Growth And 12% ROE

At first glance, Uni-President China Holdings seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.3%. Yet, Uni-President China Holdings has posted measly growth of 3.1% over the past five years. That's a bit unexpected from a company which has such a high rate of return. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Uni-President China 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 1.8% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. What is 220 worth today? The intrinsic value infographic in our free research report helps visualize whether 220 is currently mispriced by the market.

Is Uni-President China Holdings Making Efficient Use Of Its Profits?

Uni-President China Holdings has a very high three-year median payout ratio of 112%suggesting that the company's shareholders are getting paid from more than just the company's income. This is indicative of risk. You can see the 2 risks we have identified for Uni-President China Holdings by visiting our risks dashboard for free on our platform here.

Moreover, Uni-President China Holdings has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 105%. Regardless, the future ROE for Uni-President China Holdings is predicted to rise to 17% despite there being not much change expected in its payout ratio.

Conclusion

In total, it does look like Uni-President China Holdings has some positive aspects to its business. Especially the growth in earnings which was backed by an impressive ROE. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com