Has HongGuang Lighting Holdings Company Limited's (HKG:6908) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

By
Simply Wall St
Published
April 05, 2021
SEHK:6908

HongGuang Lighting Holdings (HKG:6908) has had a great run on the share market with its stock up by a significant 1,215% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study HongGuang Lighting 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for HongGuang Lighting 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 HongGuang Lighting Holdings is:

2.7% = CN¥4.6m ÷ CN¥172m (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.03 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.

HongGuang Lighting Holdings' Earnings Growth And 2.7% ROE

As you can see, HongGuang Lighting Holdings' ROE looks pretty weak. Even when compared to the industry average of 7.6%, the ROE figure is pretty disappointing. HongGuang Lighting Holdings was still able to see a decent net income growth of 10% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place.

As a next step, we compared HongGuang Lighting Holdings' 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 9.1% in the same period.

past-earnings-growth
SEHK:6908 Past Earnings Growth April 5th 2021

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. Is HongGuang Lighting Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is HongGuang Lighting Holdings Efficiently Re-investing Its Profits?

Summary

In total, it does look like HongGuang Lighting Holdings has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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 2 risks we have identified for HongGuang Lighting 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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