China Overseas Property Holdings Limited (HKG: 2669) is doing well: is the market following fundamentals?
China Overseas Property Holdings (HKG: 2669) stock is up 8.4% in the past month. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s KPIs to see if they could influence the market. In particular, we will be paying close attention to the ROE of China Overseas Property Holdings today.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
Check out our latest analysis for China Overseas Property Holdings
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of China Overseas Property Holdings is:
33% = HK $ 817 million ÷ HK $ 2.5 billion (based on the last twelve months to June 2021).
“Return” refers to a company’s profits over the past year. Another way to look at this is that for every HK $ 1 worth of shares, the company was able to make HK $ 0.33 in profit.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
China Overseas Property Holdings profit growth and 33% ROE
For starters, China Overseas Property Holdings has a pretty high ROE, which is interesting. Second, a comparison with the industry’s reported average ROE of 9.2% is also not going unnoticed for us. Under these circumstances, China Overseas Property Holdings’ net profit growth of 26% over five years was to be expected.
As a next step, we compared the net income growth of China Overseas Property Holdings with the industry, and luckily, we found that the growth observed by the company is above the industry average growth of 13%.
Profit growth is a huge factor in the valuation of stocks. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps him determine whether the stock is set for a bright or dark future. A 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 outlook. So, you might want to check whether China Overseas Property Holdings is trading high P / E or low P / E, relative to its industry.
Is China Overseas Property Holdings Efficiently Reinvesting Its Profits?
The three-year median payout ratio for China Overseas Property Holdings is 31%, which is moderately low. The company retains the remaining 69%. At first glance, the dividend is well hedged and China Overseas Property Holdings is effectively reinvesting its profits as evidenced by the exceptional growth we discussed above.
Additionally, China Overseas Property Holdings has paid dividends over a six-year period, which means the company is very serious about sharing its profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 30%. As a result, China Overseas Property Holdings ‘ROE is not expected to change much either, which we have deduced from analysts’ estimate of 36% for future ROE.
Overall, we are quite satisfied with the performance of China Overseas Property Holdings. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. We also looked at the latest analysts’ forecast and found that the company’s profit growth is expected to be similar to its current growth rate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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