Is CITIC Telecom International Holdings Limited's (HKG:1883) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that CITIC Telecom International Holdings' (HKG:1883) stock increased significantly by 5.3% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on CITIC Telecom International Holdings' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 CITIC Telecom International Holdings

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for CITIC Telecom International Holdings is:

13% = HK$1.4b ÷ HK$11b (Based on the trailing twelve months to June 2023).

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$0.13 in profit.

Why Is ROE Important For 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 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.

CITIC Telecom International Holdings' Earnings Growth And 13% ROE

To begin with, CITIC Telecom International Holdings seems to have a respectable ROE. Especially when compared to the industry average of 6.0% the company's ROE looks pretty impressive. Probably as a result of this, CITIC Telecom International Holdings was able to see a decent growth of 6.1% over the last five years.

We then performed a comparison between CITIC Telecom International Holdings' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 7.5% in the same 5-year period.

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

Is CITIC Telecom International Holdings Efficiently Re-investing Its Profits?

CITIC Telecom International Holdings has a significant three-year median payout ratio of 75%, meaning that it is left with only 25% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Besides, CITIC Telecom International Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 73%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 13%.

Summary

Overall, we are quite pleased with CITIC Telecom International Holdings' performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.