Is Weakness In Huaxi Holdings Company Limited (HKG:1689) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 4.7% over the past month, it is easy to disregard Huaxi Holdings (HKG:1689). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Huaxi Holdings' ROE.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Huaxi Holdings

How Do You Calculate Return On Equity?

The formula for ROE is:

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

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

32% = HK$129m ÷ HK$402m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.32 in profit.

Why Is ROE Important For 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 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.

Huaxi Holdings' Earnings Growth And 32% ROE

To begin with, Huaxi Holdings has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 6.6% the company's ROE is quite impressive. This likely paved the way for the modest 17% net income growth seen by Huaxi Holdings over the past five years. growth

As a next step, we compared Huaxi 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 6.7%.

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

Is Huaxi Holdings Making Efficient Use Of Its Profits?

Huaxi Holdings has a significant three-year median payout ratio of 71%, meaning that it is left with only 29% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Huaxi Holdings has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with Huaxi Holdings' performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Up till now, we've only made a short study of the company's growth data. To gain further insights into Huaxi 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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