CNT Group Limited’s (HKG:701) Earnings Dropped -57.21%, How Did It Fare Against The Industry?

After looking at CNT Group Limited’s (HKG:701) latest earnings announcement (31 December 2017), I found it useful to revisit the company’s performance in the past couple of years and assess this against the most recent figures. As a long-term investor I tend to focus on earnings trend, rather than a single number at one point in time. Also, comparing it against an industry benchmark to understand whether it outperformed, or is simply riding an industry wave, is a crucial aspect. Below is a brief commentary on my key takeaways. See our latest analysis for CNT Group

Was 701’s recent earnings decline worse than the long-term trend and the industry?

701’s trailing twelve-month earnings (from 31 December 2017) of HK$37.52m has more than halved from HK$87.67m in the prior year. Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of 2.47%, indicating the rate at which 701 is growing has slowed down. Why is this? Well, let’s look at what’s occurring with margins and whether the whole industry is facing the same headwind.

In the last couple of years, revenue growth has fallen behind earnings, which suggests that CNT Group’s bottom line has been propelled by unmaintainable cost-cutting. Inspecting growth from a sector-level, the HK chemicals industry has been growing, albeit, at a unexciting single-digit rate of 4.81% over the past year, and a flatter -1.83% over the last five years. This suggests that any headwind the industry is experiencing, it’s hitting CNT Group harder than its peers.

SEHK:701 Income Statement June 21st 18
SEHK:701 Income Statement June 21st 18
In terms of returns from investment, CNT Group has not invested its equity funds well, leading to a 2.66% return on equity (ROE), below the sensible minimum of 20%. Furthermore, its return on assets (ROA) of 1.60% is below the HK Chemicals industry of 5.34%, indicating CNT Group’s are utilized less efficiently. And finally, its return on capital (ROC), which also accounts for CNT Group’s debt level, has declined over the past 3 years from 10.72% to 1.90%.

What does this mean?

CNT Group’s track record can be a valuable insight into its earnings performance, but it certainly doesn’t tell the whole story. Usually companies that experience an extended period of reduction in earnings are going through some sort of reinvestment phase Although, if the whole industry is struggling to grow over time, it may be a indicator of a structural change, which makes CNT Group and its peers a riskier investment. I recommend you continue to research CNT Group to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 701’s future growth? Take a look at our free research report of analyst consensus for 701’s outlook.
  2. Financial Health: Is 701’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2017. This may not be consistent with full year annual report figures.