Most readers would already know that International Housewares Retail's (HKG:1373) stock increased by 8.3% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study International Housewares Retail's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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 International Housewares Retail is:
32% = HK$279m ÷ HK$868m (Based on the trailing twelve months to October 2020).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.32.
What Has ROE Got To Do With 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. 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.
International Housewares Retail's Earnings Growth And 32% ROE
Firstly, we acknowledge that International Housewares Retail has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 8.4% which is quite remarkable. So, the substantial 24% net income growth seen by International Housewares Retail over the past five years isn't overly surprising.
As a next step, we compared International Housewares Retail'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 8.5%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if International Housewares Retail is trading on a high P/E or a low P/E, relative to its industry.
Is International Housewares Retail Using Its Retained Earnings Effectively?
International Housewares Retail has a significant three-year median payout ratio of 82%, meaning the company only retains 18% 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, International Housewares Retail has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.
On the whole, we feel that International Housewares Retail's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on International Housewares Retail and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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