Is Hang Chi Holdings Limited's (HKG:8405) Latest Stock Performance Being Led By Its Strong Fundamentals?

Most readers would already know that Hang Chi Holdings' (HKG:8405) stock increased by 5.9% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Hang Chi 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Hang Chi Holdings

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Hang Chi Holdings is:

27% = HK$45m ÷ HK$167m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.27 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. 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. 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.

Hang Chi Holdings' Earnings Growth And 27% ROE

Firstly, we acknowledge that Hang Chi Holdings has a significantly high ROE. Secondly, even when compared to the industry average of 7.2% the company's ROE is quite impressive. So, the substantial 32% net income growth seen by Hang Chi Holdings over the past five years isn't overly surprising.

As a next step, we compared Hang Chi 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 6.0%.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Hang Chi Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hang Chi Holdings Using Its Retained Earnings Effectively?

Hang Chi Holdings' significant three-year median payout ratio of 82% (where it is retaining only 18% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Besides, Hang Chi Holdings has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Hang Chi Holdings' performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Hang Chi Holdings' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. 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.
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