Tenfu (Cayman) Holdings Company Limited's (HKG:6868) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that Tenfu (Cayman) Holdings' (HKG:6868) stock increased significantly by 22% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Tenfu (Cayman) Holdings' ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Tenfu (Cayman) Holdings

How Is ROE Calculated?

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 Tenfu (Cayman) Holdings is:

13% = CN¥230m ÷ CN¥1.7b (Based on the trailing twelve months to June 2023).

The 'return' is the amount earned after tax over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.13 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Tenfu (Cayman) Holdings' Earnings Growth And 13% ROE

To start with, Tenfu (Cayman) Holdings' ROE looks acceptable. Especially when compared to the industry average of 9.2% the company's ROE looks pretty impressive. Despite this, Tenfu (Cayman) Holdings' five year net income growth was quite flat over the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then compared Tenfu (Cayman) Holdings' net income growth with the industry and found that the average industry growth rate was 2.2% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Tenfu (Cayman) Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tenfu (Cayman) Holdings Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 79% (meaning, the company retains only 21% of profits) for Tenfu (Cayman) Holdings suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

In addition, Tenfu (Cayman) 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.

Summary

On the whole, we do feel that Tenfu (Cayman) Holdings has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Tenfu (Cayman) Holdings' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.