Are Strong Financial Prospects The Force That Is Driving The Momentum In Sundy Service Group Co. Ltd's HKG:9608) Stock?

By
Simply Wall St
Published
May 11, 2022
SEHK:9608
Source: Shutterstock

Sundy Service Group (HKG:9608) has had a great run on the share market with its stock up by a significant 18% over the last week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Sundy Service Group's 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Sundy Service Group

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 Sundy Service Group is:

18% = CN¥55m ÷ CN¥310m (Based on the trailing twelve months to December 2021).

The 'return' is the yearly profit. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.18 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of Sundy Service Group's Earnings Growth And 18% ROE

To begin with, Sundy Service Group seems to have a respectable ROE. Especially when compared to the industry average of 7.2% the company's ROE looks pretty impressive. This probably laid the ground for Sundy Service Group's significant 24% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Sundy Service Group's growth is quite high when compared to the industry average growth of 8.2% in the same period, which is great to see.

past-earnings-growth
SEHK:9608 Past Earnings Growth May 11th 2022

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Sundy Service Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sundy Service Group Efficiently Re-investing Its Profits?

Given that Sundy Service Group doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, we are pretty happy with Sundy Service 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 1 risk we have identified for Sundy Service Group by visiting our risks dashboard for free on our platform here.

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