Should Weakness in HengTen Networks Group Limited's (HKG:136) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

HengTen Networks Group (HKG:136) has had a rough month with its share price down 15%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study HengTen Networks Group's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for HengTen Networks Group

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for HengTen Networks Group is:

3.9% = CN¥46m ÷ CN¥1.2b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.04 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. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

HengTen Networks Group's Earnings Growth And 3.9% ROE

When you first look at it, HengTen Networks Group's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 4.5%, we may spare it some thought. Moreover, we are quite pleased to see that HengTen Networks Group's net income grew significantly at a rate of 56% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that the growth figure reported by HengTen Networks Group compares quite favourably to the industry average, which shows a decline of 1.1% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about HengTen Networks Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is HengTen Networks Group Making Efficient Use Of Its Profits?

Conclusion

In total, it does look like HengTen Networks Group has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 3 risks we have identified for HengTen Networks Group by visiting our risks dashboard for free on our platform here.

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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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