SITC International Holdings Company Limited's (HKG:1308) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that SITC International Holdings' (HKG:1308) stock increased significantly by 41% over the past 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. Particularly, we will be paying attention to SITC International Holdings' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for SITC International Holdings

How Do You Calculate Return On Equity?

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 SITC International Holdings is:

28% = US$536m ÷ US$1.9b (Based on the trailing twelve months to December 2023).

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$0.28.

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. 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.

SITC International Holdings' Earnings Growth And 28% ROE

First thing first, we like that SITC International Holdings has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 8.6% which is quite remarkable. Under the circumstances, SITC International Holdings' considerable five year net income growth of 36% was to be expected.

Next, on comparing with the industry net income growth, we found that SITC International Holdings' growth is quite high when compared to the industry average growth of 25% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about SITC International Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is SITC International Holdings Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 70% (implying that it keeps only 30% of profits) for SITC International Holdings suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, SITC International Holdings 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. 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 84%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 26%.

Conclusion

Overall, we are quite pleased with SITC International Holdings' performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. 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 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.