Weak Financial Prospects Seem To Be Dragging Down Fulu Holdings Limited (HKG:2101) Stock

It is hard to get excited after looking at Fulu Holdings' (HKG:2101) recent performance, when its stock has declined 26% over the past three months. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Specifically, we decided to study Fulu Holdings' 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.

View our latest analysis for Fulu Holdings

How Do You Calculate Return On Equity?

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 Fulu Holdings is:

7.9% = CN¥96m ÷ CN¥1.2b (Based on the trailing twelve months to June 2023).

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$0.08.

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 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.

Fulu Holdings' Earnings Growth And 7.9% ROE

When you first look at it, Fulu Holdings' ROE doesn't look that attractive. However, its ROE is similar to the industry average of 8.5%, so we won't completely dismiss the company. But then again, Fulu Holdings' five year net income shrunk at a rate of 2.2%. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.

So, as a next step, we compared Fulu Holdings' performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 1.0% over the last few years.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Fulu Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Fulu Holdings Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 89% (implying that 11% of the profits are retained), most of Fulu Holdings' profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. You can see the 3 risks we have identified for Fulu Holdings by visiting our risks dashboard for free on our platform here.

Only recently, Fulu Holdings stated paying a dividend. This likely means that the management might have concluded that its shareholders have a strong preference for dividends.

Summary

In total, we would have a hard think before deciding on any investment action concerning Fulu Holdings. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Up till now, we've only made a short study of the company's growth data. You can do your own research on Fulu Holdings 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.