Is Kingboard Laminates Holdings Limited's (HKG:1888) Recent Performance Underpinned By Weak Financials?

With its stock down 19% over the past month, it is easy to disregard Kingboard Laminates Holdings (HKG:1888). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Particularly, we will be paying attention to Kingboard Laminates Holdings' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Kingboard Laminates 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 Kingboard Laminates Holdings is:

3.6% = HK$506m ÷ HK$14b (Based on the trailing twelve months to June 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.04.

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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Kingboard Laminates Holdings' Earnings Growth And 3.6% ROE

As you can see, Kingboard Laminates Holdings' ROE looks pretty weak. Even when compared to the industry average of 7.7%, the ROE figure is pretty disappointing. Therefore, the disappointing ROE therefore provides a background to Kingboard Laminates Holdings' very little net income growth of 2.4% over the past five years.

We then compared Kingboard Laminates Holdings' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 4.8% in the same 5-year 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 Kingboard Laminates Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kingboard Laminates Holdings Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 60% (that is, the company retains only 40% of its income) over the past three years for Kingboard Laminates Holdings suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Moreover, Kingboard Laminates Holdings has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 63% of its profits over the next three years. However, Kingboard Laminates Holdings' ROE is predicted to rise to 17% despite there being no anticipated change in its payout ratio.

Summary

In total, we would have a hard think before deciding on any investment action concerning Kingboard Laminates Holdings. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.