Computer And Technologies Holdings Limited's (HKG:46) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Computer And Technologies Holdings (HKG:46) has had a great run on the share market with its stock up by a significant 12% over the last 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. In this article, we decided to focus on Computer And Technologies Holdings' ROE.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Computer And Technologies Holdings

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Computer And Technologies Holdings is:

9.7% = HK$47m ÷ HK$482m (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.10 in profit.

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. 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 Computer And Technologies Holdings' Earnings Growth And 9.7% ROE

To begin with, Computer And Technologies Holdings seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 11%. Consequently, this likely laid the ground for the decent growth of 5.9% seen over the past five years by Computer And Technologies Holdings.

We then compared Computer And Technologies Holdings' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.7% in the same period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Computer And Technologies Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Computer And Technologies Holdings Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 69% (or a retention ratio of 31%) for Computer And Technologies Holdings suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Computer And Technologies Holdings has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we do feel that Computer And Technologies Holdings has some positive attributes. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. Up till now, we've only made a short study of the company's growth data. To gain further insights into Computer And Technologies Holdings' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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