Sprocomm Intelligence Limited's (HKG:1401) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

By
Simply Wall St
Published
October 18, 2020
SEHK:1401

Sprocomm Intelligence's (HKG:1401) stock is up by a considerable 20% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Sprocomm Intelligence's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Sprocomm Intelligence

How Do You 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 Sprocomm Intelligence is:

12% = CN¥38m ÷ CN¥315m (Based on the trailing twelve months to June 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$0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned 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. 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.

Sprocomm Intelligence's Earnings Growth And 12% ROE

To begin with, Sprocomm Intelligence seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 10%. However, we are curious as to how Sprocomm Intelligence's decent returns still resulted in flat growth for Sprocomm Intelligence in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Sprocomm Intelligence's reported growth was a little less than the industry growth of1.3% in the same period.

past-earnings-growth
SEHK:1401 Past Earnings Growth October 19th 2020

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Sprocomm Intelligence fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sprocomm Intelligence Using Its Retained Earnings Effectively?

Summary

On the whole, we do feel that Sprocomm Intelligence has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. Up till now, we've only made a short study of the company's growth data. You can do your own research on Sprocomm Intelligence 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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