It is hard to get excited after looking at Greatview Aseptic Packaging's (HKG:468) recent performance, when its stock has declined 17% over the past month. 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. Specifically, we decided to study Greatview Aseptic Packaging'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Is ROE Calculated?
Return on equity 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 Greatview Aseptic Packaging is:
14% = CN¥343m ÷ CN¥2.5b (Based on the trailing twelve months to December 2020).
The 'return' is the yearly profit. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.14.
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. 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.
A Side By Side comparison of Greatview Aseptic Packaging's Earnings Growth And 14% ROE
At first glance, Greatview Aseptic Packaging seems to have a decent ROE. On comparing with the average industry ROE of 6.7% the company's ROE looks pretty remarkable. Despite this, Greatview Aseptic Packaging's five year net income growth was quite flat over the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then compared Greatview Aseptic Packaging's net income growth with the industry and found that the industry which has shrunk at a rate of 2.0% in the same period, which makes the company's growth somewhat better.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Efficiently Re-investing Its Profits?
With a high three-year median payout ratio of 89% (implying that the company keeps only 11% of its income) of its business to reinvest into its business), most of Greatview Aseptic Packaging's profits are being paid to shareholders, which explains the absence of growth in earnings.
In addition, Greatview Aseptic Packaging has been paying dividends over a period of nine years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 94% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 16%.
In total, we are pretty happy with Greatview Aseptic Packaging's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. 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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