Is Modern Living Investments Holdings Limited's(HKG:8426) Recent Stock Performance Tethered To Its Strong Fundamentals?

By
Simply Wall St
Published
January 25, 2022
SEHK:8426
Source: Shutterstock

Modern Living Investments Holdings (HKG:8426) has had a great run on the share market with its stock up by a significant 17% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Modern Living Investments Holdings' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Modern Living Investments Holdings

How Is ROE Calculated?

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 Modern Living Investments Holdings is:

12% = HK$16m ÷ HK$139m (Based on the trailing twelve months to September 2021).

The 'return' refers to a company's earnings over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.12.

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. 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.

Modern Living Investments Holdings' Earnings Growth And 12% ROE

To begin with, Modern Living Investments Holdings seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.5%. Probably as a result of this, Modern Living Investments Holdings was able to see an impressive net income growth of 34% over the last five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Modern Living Investments Holdings' 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 12%.

past-earnings-growth
SEHK:8426 Past Earnings Growth January 25th 2022

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Modern Living Investments Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Modern Living Investments Holdings Using Its Retained Earnings Effectively?

Modern Living Investments Holdings has a significant three-year median payout ratio of 53%, meaning the company only retains 47% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Additionally, Modern Living Investments Holdings has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we feel that Modern Living Investments Holdings' performance has been quite good. 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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Modern Living Investments Holdings' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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