BOE Varitronix Limited's (HKG:710) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

BOE Varitronix (HKG:710) has had a great run on the share market with its stock up by a significant 48% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study BOE Varitronix's ROE in this article.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for BOE Varitronix

How Is ROE Calculated?

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 BOE Varitronix is:

10% = HK$454m ÷ HK$4.4b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

BOE Varitronix's Earnings Growth And 10% ROE

On the face of it, BOE Varitronix's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 7.6% which we definitely can't overlook. Even more so after seeing BOE Varitronix's exceptional 45% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

As a next step, we compared BOE Varitronix's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 2.7%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 BOE Varitronix's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is BOE Varitronix Efficiently Re-investing Its Profits?

BOE Varitronix has a three-year median payout ratio of 31% (where it is retaining 69% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like BOE Varitronix is reinvesting its earnings efficiently.

Additionally, BOE Varitronix has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 29%. However, BOE Varitronix's ROE is predicted to rise to 13% despite there being no anticipated change in its payout ratio.

Summary

Overall, we are quite pleased with BOE Varitronix's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.