Wanda Hotel Development Company Limited's (HKG:169) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Wanda Hotel Development (HKG:169) has had a great run on the share market with its stock up by a significant 53% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Wanda Hotel Development'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Wanda Hotel Development

How To Calculate Return On Equity?

ROE 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 Wanda Hotel Development is:

3.4% = HK$96m ÷ HK$2.8b (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$0.03.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Wanda Hotel Development's Earnings Growth And 3.4% ROE

It is quite clear that Wanda Hotel Development's ROE is rather low. Even compared to the average industry ROE of 10%, the company's ROE is quite dismal. Hence, the flat earnings seen by Wanda Hotel Development over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Wanda Hotel Development's reported growth was lower than the industry growth of 18% in the same period, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Wanda Hotel Development's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Wanda Hotel Development Using Its Retained Earnings Effectively?

Conclusion

Overall, we have mixed feelings about Wanda Hotel Development. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Up till now, we've only made a short study of the company's growth data. To gain further insights into Wanda Hotel Development's 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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