Hsin Kao Gas Co.,Ltd.'s (TPE:9931) Stock Financial Prospects Look Bleak: Should Shareholders Be Prepared For A Share Price Correction?

Hsin Kao GasLtd's (TPE:9931) stock up by 4.5% over the past three months. However, in this article, we decided to focus on its weak financials, as long-term fundamentals ultimately dictate market outcomes. Particularly, we will be paying attention to Hsin Kao GasLtd's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Hsin Kao GasLtd

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Hsin Kao GasLtd is:

8.8% = NT$186m ÷ NT$2.1b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Hsin Kao GasLtd's Earnings Growth And 8.8% ROE

On the face of it, Hsin Kao GasLtd's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 11% either. Thus, the low net income growth of 2.8% seen by Hsin Kao GasLtd over the past five years could probably be the result of the low ROE.

Next, on comparing with the industry net income growth, we found that Hsin Kao GasLtd's reported growth was lower than the industry growth of 4.7% in the same period, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Hsin Kao GasLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hsin Kao GasLtd Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 63% (or a retention ratio of 37%), most of Hsin Kao GasLtd's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Hsin Kao GasLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we would be extremely cautious before making any decision on Hsin Kao GasLtd. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate.

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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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