Tradelink Electronic Commerce's (HKG:536) stock is up by 9.6% over the past three months. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement Particularly, we will be paying attention to Tradelink Electronic Commerce's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How To Calculate Return On Equity?
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 Tradelink Electronic Commerce is:
20% = HK$68m ÷ HK$340m (Based on the trailing twelve months to June 2020).
The 'return' refers to a company's earnings over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.20.
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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Tradelink Electronic Commerce's Earnings Growth And 20% ROE
At first glance, Tradelink Electronic Commerce seems to have a decent ROE. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. However, we are curious as to how the high returns still resulted in flat growth for Tradelink Electronic Commerce in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
Next, on comparing with the industry net income growth, we found that Tradelink Electronic Commerce's reported growth was lower than the industry growth of 9.7% in the same period, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Tradelink Electronic Commerce fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Tradelink Electronic Commerce Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 96% (meaning, the company retains only 3.6% of profits) for Tradelink Electronic Commerce suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.
Additionally, Tradelink Electronic Commerce 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.
On the whole, we feel that the performance shown by Tradelink Electronic Commerce can be open to many interpretations. In spite of the high ROE, the company has failed to see growth in its earnings due to it paying out most of its profits as dividend, with almost nothing left to invest into its own business. Up till now, we've only made a short study of the company's growth data. You can do your own research on Tradelink Electronic Commerce and see how it has performed in the past by looking at this FREE detailed graph 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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