Are Robust Financials Driving The Recent Rally In Infinity Logistics and Transport Ventures Limited's (HKG:1442) Stock?

Infinity Logistics and Transport Ventures' (HKG:1442) stock is up by a considerable 45% 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 Infinity Logistics and Transport Ventures' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Infinity Logistics and Transport Ventures

How Is ROE Calculated?

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 Infinity Logistics and Transport Ventures is:

14% = RM24m ÷ RM171m (Based on the trailing twelve months to June 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$0.14.

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. 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. 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.

Infinity Logistics and Transport Ventures' Earnings Growth And 14% ROE

To start with, Infinity Logistics and Transport Ventures' ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.2%. This certainly adds some context to Infinity Logistics and Transport Ventures' exceptional 20% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Infinity Logistics and Transport Ventures' growth is quite high when compared to the industry average growth of 16% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Infinity Logistics and Transport Ventures fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Infinity Logistics and Transport Ventures Efficiently Re-investing Its Profits?

Infinity Logistics and Transport Ventures' three-year median payout ratio to shareholders is 16%, which is quite low. This implies that the company is retaining 84% of its profits. So it looks like Infinity Logistics and Transport Ventures is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Conclusion

In total, we are pretty happy with Infinity Logistics and Transport Ventures' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 4 risks we have identified for Infinity Logistics and Transport Ventures.

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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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