Could The Market Be Wrong About Green Future Food Hydrocolloid Marine Science Company Limited (HKG:1084) Given Its Attractive Financial Prospects?

Green Future Food Hydrocolloid Marine Science (HKG:1084) has had a rough month with its share price down 1.9%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Green Future Food Hydrocolloid Marine Science's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Green Future Food Hydrocolloid Marine Science

How Is ROE Calculated?

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 Green Future Food Hydrocolloid Marine Science is:

13% = HK$91m ÷ HK$691m (Based on the trailing twelve months to June 2020).

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$0.13 in profit.

What Has ROE Got To Do With 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.

Green Future Food Hydrocolloid Marine Science's Earnings Growth And 13% ROE

At first glance, Green Future Food Hydrocolloid Marine Science seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.7%. Probably as a result of this, Green Future Food Hydrocolloid Marine Science was able to see a decent growth of 15% over the last five years.

As a next step, we compared Green Future Food Hydrocolloid Marine Science's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 16% in the same 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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Green Future Food Hydrocolloid Marine Science's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Green Future Food Hydrocolloid Marine Science Making Efficient Use Of Its Profits?

Green Future Food Hydrocolloid Marine Science has a healthy combination of a moderate three-year median payout ratio of 46% (or a retention ratio of 54%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

While Green Future Food Hydrocolloid Marine Science has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Conclusion

On the whole, we feel that Green Future Food Hydrocolloid Marine Science's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 3 risks we have identified for Green Future Food Hydrocolloid Marine Science.

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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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