Orient Overseas (International) Limited's (HKG:316) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Orient Overseas (International)'s (HKG:316) recent performance, when its stock has declined 9.8% over the past week. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Orient Overseas (International)'s ROE in this article.

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.

Check out our latest analysis for Orient Overseas (International)

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 Orient Overseas (International) is:

47% = US$5.4b ÷ US$12b (Based on the trailing twelve months to June 2023).

The 'return' is the profit over the last twelve months. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.47.

Why Is ROE Important For 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.

Orient Overseas (International)'s Earnings Growth And 47% ROE

Firstly, we acknowledge that Orient Overseas (International) has a significantly high ROE. Secondly, even when compared to the industry average of 15% the company's ROE is quite impressive. Under the circumstances, Orient Overseas (International)'s considerable five year net income growth of 64% was to be expected.

Next, on comparing with the industry net income growth, we found that Orient Overseas (International)'s growth is quite high when compared to the industry average growth of 35% 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. 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 Orient Overseas (International)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Orient Overseas (International) Efficiently Re-investing Its Profits?

The three-year median payout ratio for Orient Overseas (International) is 40%, which is moderately low. The company is retaining the remaining 60%. By the looks of it, the dividend is well covered and Orient Overseas (International) is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Orient Overseas (International) is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 51% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 12%) over the same period.

Conclusion

In total, we are pretty happy with Orient Overseas (International)'s performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.