Can Sunac Services Holdings Limited's (HKG:1516) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?

Sunac Services Holdings (HKG:1516) has had a great run on the share market with its stock up by a significant 9.8% over the last week. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Particularly, we will be paying attention to Sunac Services Holdings' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How To Calculate Return On Equity?

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 Sunac Services Holdings is:

3.2% = CN¥169m ÷ CN¥5.2b (Based on the trailing twelve months to June 2025).

The 'return' is the profit 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$0.03 in profit.

See our latest analysis for Sunac Services Holdings

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Sunac Services Holdings' Earnings Growth And 3.2% ROE

It is hard to argue that Sunac Services Holdings' ROE is much good in and of itself. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 3.7%. Therefore, it might not be wrong to say that the five year net income decline of 53% seen by Sunac Services Holdings was possibly a result of the disappointing ROE.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate of 4.5% over the last few years, we found that Sunac Services Holdings' performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Sunac Services Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sunac Services Holdings Making Efficient Use Of Its Profits?

Sunac Services Holdings' high LTM (or last twelve month) payout ratio of 306% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Paying a dividend higher than reported profits is not a sustainable move.

Moreover, Sunac Services Holdings has been paying dividends for five years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 43% over the next three years. As a result, the expected drop in Sunac Services Holdings' payout ratio explains the anticipated rise in the company's future ROE to 9.7%, over the same period.

Summary

In total, we would have a hard think before deciding on any investment action concerning Sunac Services Holdings. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.