Hainan Meilan International Airport Company Limited's (HKG:357) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 20% over the past three months, it is easy to disregard Hainan Meilan International Airport (HKG:357). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Hainan Meilan International Airport's 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Hainan Meilan International Airport

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Hainan Meilan International Airport is:

7.4% = CN¥386m ÷ CN¥5.2b (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Hainan Meilan International Airport's Earnings Growth And 7.4% ROE

At first glance, Hainan Meilan International Airport's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 5.7% which we definitely can't overlook. This certainly adds some context to Hainan Meilan International Airport's moderate 5.2% net income growth seen 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. So there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

We then performed a comparison between Hainan Meilan International Airport's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 5.2% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for 357? You can find out in our latest intrinsic value infographic research report.

Is Hainan Meilan International Airport Efficiently Re-investing Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 14% over the next three years. As a result, the expected drop in Hainan Meilan International Airport's payout ratio explains the anticipated rise in the company's future ROE to 10%, over the same period.

Conclusion

Overall, we are quite pleased with Hainan Meilan International Airport's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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