Has Oriental Watch Holdings Limited's (HKG:398) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

By
Simply Wall St
Published
May 27, 2021
SEHK:398

Most readers would already be aware that Oriental Watch Holdings' (HKG:398) stock increased significantly by 37% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Oriental Watch Holdings' ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Oriental Watch Holdings

How Is ROE Calculated?

Return on equity 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 Oriental Watch Holdings is:

4.6% = HK$96m ÷ HK$2.1b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.05 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Oriental Watch Holdings' Earnings Growth And 4.6% ROE

On the face of it, Oriental Watch Holdings' ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 8.5%. However, we we're pleasantly surprised to see that Oriental Watch Holdings grew its net income at a significant rate of 42% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Oriental Watch Holdings' growth is quite high when compared to the industry average growth of 8.5% in the same period, which is great to see.

past-earnings-growth
SEHK:398 Past Earnings Growth May 28th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Oriental Watch Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Oriental Watch Holdings Efficiently Re-investing Its Profits?

The three-year median payout ratio for Oriental Watch Holdings is 45%, which is moderately low. The company is retaining the remaining 55%. So it seems that Oriental Watch Holdings is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Oriental Watch Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

On the whole, we do feel that Oriental Watch Holdings has some positive attributes. 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. Our risks dashboard would have the 3 risks we have identified for Oriental Watch Holdings.

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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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