Is Weakness In China Overseas Property Holdings Limited (HKG:2669) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 8.7% over the past month, it is easy to disregard China Overseas Property Holdings (HKG:2669). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to China Overseas Property Holdings' ROE today.

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.

View our latest analysis for China Overseas Property Holdings

How To 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 China Overseas Property Holdings is:

35% = HK$1.1b ÷ HK$3.2b (Based on the trailing twelve months to June 2022).

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$0.35 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. 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.

China Overseas Property Holdings' Earnings Growth And 35% ROE

First thing first, we like that China Overseas Property Holdings has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 6.9% also doesn't go unnoticed by us. As a result, China Overseas Property Holdings' exceptional 28% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that China Overseas Property Holdings' growth is quite high when compared to the industry average growth of 7.2% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 2669 worth today? The intrinsic value infographic in our free research report helps visualize whether 2669 is currently mispriced by the market.

Is China Overseas Property Holdings Using Its Retained Earnings Effectively?

China Overseas Property Holdings has a three-year median payout ratio of 30% (where it is retaining 70% of its income) which is not too low or not too high. So it seems that China Overseas Property Holdings is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, China Overseas Property Holdings has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 30%. As a result, China Overseas Property Holdings' ROE is not expected to change by much either, which we inferred from the analyst estimate of 35% for future ROE.

Summary

In total, we are pretty happy with China Overseas Property 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. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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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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.