Is Weakness In Flat Glass Group Co., Ltd. (HKG:6865) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 34% over the past three months, it is easy to disregard Flat Glass Group (HKG:6865). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Flat Glass Group'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.

View our latest analysis for Flat Glass Group

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Flat Glass Group is:

13% = CN¥3.0b ÷ CN¥23b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.13.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Flat Glass Group's Earnings Growth And 13% ROE

To start with, Flat Glass Group's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. Consequently, this likely laid the ground for the impressive net income growth of 27% seen over the past five years by Flat Glass Group. However, there could also be other drivers behind this growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between Flat Glass Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 24% in the same 5-year period.

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. 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 Flat Glass Group is trading on a high P/E or a low P/E, relative to its industry.

Is Flat Glass Group Making Efficient Use Of Its Profits?

Flat Glass Group has a really low three-year median payout ratio of 23%, meaning that it has the remaining 77% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Flat Glass Group is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 39% over the next three years. Regardless, the future ROE for Flat Glass Group is speculated to rise to 17% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

In total, we are pretty happy with Flat Glass Group's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com