IAG Holdings Limited's (HKG:8513) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

By
Simply Wall St
Published
December 31, 2021
SEHK:8513
Source: Shutterstock

IAG Holdings' (HKG:8513) stock is up by a considerable 22% over the past week. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to IAG 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for IAG 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 IAG Holdings is:

1.2% = S$209k ÷ S$18m (Based on the trailing twelve months to September 2021).

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$0.01 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

IAG Holdings' Earnings Growth And 1.2% ROE

It is hard to argue that IAG Holdings' ROE is much good in and of itself. Even compared to the average industry ROE of 12%, the company's ROE is quite dismal. Thus, the low net income growth of 3.5% seen by IAG Holdings over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that IAG Holdings' reported growth was lower than the industry growth of 15% in the same period, which is not something we like to see.

past-earnings-growth
SEHK:8513 Past Earnings Growth December 31st 2021

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about IAG Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is IAG Holdings Efficiently Re-investing Its Profits?

IAG Holdings doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business. However, there's only been very little earnings growth to show for it. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Conclusion

In total, we're a bit ambivalent about IAG Holdings' performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for IAG Holdings.

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