Uni-President China Holdings Ltd's (HKG:220) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Uni-President China Holdings (HKG:220) has had a great run on the share market with its stock up by a significant 31% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Uni-President China Holdings' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Uni-President China Holdings

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 Uni-President China Holdings is:

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

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$0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

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 8.7%. However, for some reason, the higher returns aren't reflected in Uni-President China Holdings' meagre five year net income growth average of 3.1%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. 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.

As a next step, we compared Uni-President China Holdings' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 0.7%.

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. If you're wondering about Uni-President China Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Uni-President China Holdings Using Its Retained Earnings Effectively?

Uni-President China Holdings has a very high three-year median payout ratio of 114%, which suggests that the company is dipping into more than just its profits to pay its dividend and that shows in its low earnings growth number. This is indicative of risk.

Additionally, Uni-President China Holdings has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no 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 100%. Regardless, the future ROE for Uni-President China Holdings is predicted to rise to 15% despite there being not much change expected in its payout ratio.

Summary

On the whole, we do feel that Uni-President China Holdings has some positive attributes. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.