Declining Stock and Solid Fundamentals: Is The Market Wrong About Aoyuan Healthy Life Group Company Limited (HKG:3662)?

Aoyuan Healthy Life Group (HKG:3662) has had a rough week with its share price down 3.8%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Aoyuan Healthy Life Group'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.

Check out our latest analysis for Aoyuan Healthy Life Group

How Do You 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 Aoyuan Healthy Life Group is:

21% = CN¥185m ÷ CN¥893m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.21 in profit.

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. 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. 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.

Aoyuan Healthy Life Group's Earnings Growth And 21% ROE

To begin with, Aoyuan Healthy Life Group seems to have a respectable ROE. On comparing with the average industry ROE of 10% the company's ROE looks pretty remarkable. Probably as a result of this, Aoyuan Healthy Life Group was able to see an impressive net income growth of 34% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Aoyuan Healthy Life Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 18%.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Aoyuan Healthy Life Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Aoyuan Healthy Life Group Making Efficient Use Of Its Profits?

The three-year median payout ratio for Aoyuan Healthy Life Group is 33%, which is moderately low. The company is retaining the remaining 67%. By the looks of it, the dividend is well covered and Aoyuan Healthy Life Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While Aoyuan Healthy Life Group has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 37%. Still, forecasts suggest that Aoyuan Healthy Life Group's future ROE will rise to 32% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, we are pretty happy with Aoyuan Healthy Life Group's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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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