Declining Stock and Decent Financials: Is The Market Wrong About Smart-Core Holdings Limited (HKG:2166)?

Smart-Core Holdings (HKG:2166) has had a rough three months with its share price down 9.2%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Smart-Core Holdings' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Smart-Core Holdings

How To Calculate Return On Equity?

ROE 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 Smart-Core Holdings is:

9.8% = HK$65m ÷ HK$657m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.10 in profit.

What Is The Relationship Between ROE And 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. 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.

Smart-Core Holdings' Earnings Growth And 9.8% ROE

To begin with, Smart-Core Holdings seems to have a respectable ROE. Especially when compared to the industry average of 8.0% the company's ROE looks pretty impressive. However, we are curious as to how the high returns still resulted in flat growth for Smart-Core Holdings in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Smart-Core Holdings' net income growth with the industry and discovered that the industry saw an average growth of 3.9% in the same period.

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. If you're wondering about Smart-Core Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Smart-Core Holdings Efficiently Re-investing Its Profits?

In spite of a normal three-year median payout ratio of 36% (or a retention ratio of 64%), Smart-Core Holdings hasn't seen much growth in its earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Smart-Core Holdings has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

In total, it does look like Smart-Core Holdings has some positive aspects to its business. 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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Smart-Core Holdings 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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