Henderson Investment Limited’s (HKG:97) Dismal Stock Performance Reflects Weak Fundamentals

It is hard to get excited after looking at Henderson Investment’s (HKG:97) recent performance, when its stock has declined 30% 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 Henderson Investment’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. Put another way, it reveals the company’s success at turning shareholder investments into profits.

View our latest analysis for Henderson Investment

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 Henderson Investment is:

4.8% = HK$62m ÷ HK$1.3b (Based on the trailing twelve months to December 2019).

The ‘return’ is the amount earned after tax 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?

Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

Henderson Investment’s Earnings Growth And 4.8% ROE

When you first look at it, Henderson Investment’s ROE doesn’t look that attractive. Yet, a closer study shows that the company’s ROE is similar to the industry average of 4.8%. We can see that Henderson Investment has grown at a five year net income growth average rate of 4.4%, which is a bit on the lower side. Remember, the company’s ROE is not particularly great to begin with. So this could also be one of the reasons behind the company’s low growth in earnings.

As a next step, we compared Henderson Investment’s net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 4.4% in the same period.

SEHK:97 Past Earnings Growth May 21st 2020
SEHK:97 Past Earnings Growth May 21st 2020

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Henderson Investment’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Henderson Investment Efficiently Re-investing Its Profits?

Henderson Investment has a very high three-year median payout ratio of 146%, which suggests that the company is dipping into more than just its profits to pay its dividend and that shows in its low earnings growth number. That’s a huge risk in our books. Our risks dashboard should have the 3 risks we have identified for Henderson Investment.

Additionally, Henderson Investment has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth.

Summary

Overall, we would be extremely cautious before making any decision on Henderson Investment. While the company has posted decent earnings growth, the company is retaining little to no profits and is reinvesting those profits at a low rate of return. This makes us doubtful if that growth could continue, especially if by any chance the business is faced with any sort of risk. So far, we’ve only made a quick discussion around the company’s earnings growth. So it may be worth checking this free detailed graph of Henderson Investment’s past earnings, as well as revenue and cash flows to get a deeper insight into the company’s performance.

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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. Thank you for reading.