Could Karin Technology Holdings Limited's (SGX:K29) Weak Financials Mean That The Market Could Correct Its Share Price?

Most readers would already know that Karin Technology Holdings' (SGX:K29) stock increased by 3.3% over the past week. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. Specifically, we decided to study Karin Technology Holdings' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Karin Technology Holdings

How Do You Calculate Return On Equity?

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 Karin Technology Holdings is:

1.2% = HK$5.0m ÷ HK$427m (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.01 in profit.

What Is The Relationship Between ROE And 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.

Karin Technology Holdings' Earnings Growth And 1.2% ROE

As you can see, Karin Technology Holdings' ROE looks pretty weak. Even when compared to the industry average of 9.1%, the ROE figure is pretty disappointing. For this reason, Karin Technology Holdings' five year net income decline of 12% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

As a next step, we compared Karin Technology Holdings' performance with the industry and found thatKarin Technology Holdings' performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 7.7% in the same period, which is a slower than the company.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Karin Technology Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is Karin Technology Holdings Using Its Retained Earnings Effectively?

With a three-year median payout ratio as high as 120%,Karin Technology Holdings' shrinking earnings don't come as a surprise as the company is paying a dividend which is beyond its means. Its usually very hard to sustain dividend payments that are higher than reported profits. You can see the 5 risks we have identified for Karin Technology Holdings by visiting our risks dashboard for free on our platform here.

Additionally, Karin Technology Holdings has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Karin Technology Holdings. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. Up till now, we've only made a short study of the company's growth data. To gain further insights into Karin Technology Holdings' past profit growth, check out this visualization of past earnings, revenue and cash flows.

If you decide to trade Karin Technology Holdings, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.