Does The Market Have A Low Tolerance For AAC Technologies Holdings Inc.'s (HKG:2018) Mixed Fundamentals?

With its stock down 5.1% over the past week, it is easy to disregard AAC Technologies Holdings (HKG:2018). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to AAC Technologies Holdings' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for AAC Technologies Holdings

How To Calculate Return On Equity?

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 AAC Technologies Holdings is:

7.7% = CN¥1.5b ÷ CN¥20b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.08.

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.

A Side By Side comparison of AAC Technologies Holdings' Earnings Growth And 7.7% ROE

At first glance, AAC Technologies Holdings' ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.8%. Having said that, AAC Technologies Holdings' five year net income decline rate was 9.5%. Bear in mind, the company does have a slightly low ROE. Therefore, the decline in earnings could also be the result of this.

However, when we compared AAC Technologies Holdings' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 3.9% in the same period. This is quite worrisome.

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). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for 2018? You can find out in our latest intrinsic value infographic research report.

Is AAC Technologies Holdings Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 40% (where it is retaining 60% of its profits), AAC Technologies Holdings has seen a decline in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, AAC Technologies 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 45%. Still, forecasts suggest that AAC Technologies Holdings' future ROE will rise to 14% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we have mixed feelings about AAC Technologies Holdings. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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. 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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