Is Greatview Aseptic Packaging Company Limited's (HKG:468) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Greatview Aseptic Packaging's (HKG:468) stock is up by a considerable 53% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Greatview Aseptic Packaging's ROE.

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 Greatview Aseptic Packaging

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 Greatview Aseptic Packaging is:

13% = CN¥321m ÷ CN¥2.4b (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$0.13 in profit.

What Has ROE Got To Do With 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. 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.

A Side By Side comparison of Greatview Aseptic Packaging's Earnings Growth And 13% ROE

At first glance, Greatview Aseptic Packaging seems to have a decent ROE. Especially when compared to the industry average of 6.6% the company's ROE looks pretty impressive. However, for some reason, the higher returns aren't reflected in Greatview Aseptic Packaging's meagre five year net income growth average of 2.6%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Greatview Aseptic Packaging's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 6.7% in the same period.

Earnings growth is a huge factor in stock valuation. 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. What is 468 worth today? The intrinsic value infographic in our free research report helps visualize whether 468 is currently mispriced by the market.

Is Greatview Aseptic Packaging Making Efficient Use Of Its Profits?

Greatview Aseptic Packaging has a three-year median payout ratio of 88% (implying that it keeps only 12% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

Moreover, Greatview Aseptic Packaging has been paying dividends for eight years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. 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 88%. Still, forecasts suggest that Greatview Aseptic Packaging's future ROE will rise to 17% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we do feel that Greatview Aseptic Packaging has some positive attributes. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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