Stock Analysis

World-Link Logistics (Asia) Holding Limited's (HKG:6083) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

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SEHK:6083
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It is hard to get excited after looking at World-Link Logistics (Asia) Holding's (HKG:6083) recent performance, when its stock has declined 6.2% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on World-Link Logistics (Asia) Holding's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for World-Link Logistics (Asia) Holding

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 World-Link Logistics (Asia) Holding is:

21% = HK$24m ÷ HK$116m (Based on the trailing twelve months to June 2020).

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$0.21.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

World-Link Logistics (Asia) Holding's Earnings Growth And 21% ROE

To start with, World-Link Logistics (Asia) Holding's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.2%. Probably as a result of this, World-Link Logistics (Asia) Holding was able to see a decent growth of 16% over the last five years.

Next, on comparing World-Link Logistics (Asia) Holding's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 16% in the same period.

past-earnings-growth
SEHK:6083 Past Earnings Growth December 10th 2020

Earnings growth is a huge factor in stock valuation. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if World-Link Logistics (Asia) Holding is trading on a high P/E or a low P/E, relative to its industry.

Is World-Link Logistics (Asia) Holding Efficiently Re-investing Its Profits?

In World-Link Logistics (Asia) Holding's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 24% (or a retention ratio of 76%), which suggests that the company is investing most of its profits to grow its business.

Besides, World-Link Logistics (Asia) Holding has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with World-Link Logistics (Asia) Holding's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. To know the 2 risks we have identified for World-Link Logistics (Asia) Holding visit our risks dashboard for free.

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