Is the strong financial outlook the driving force behind Ever Harvest Group Holdings Limited’s HKG:1549) stock?
Shares of Ever Harvest Group Holdings (HKG:1549) are up 70% in the past three months. Given that the market rewards strong long-term financials, we wonder if this is the case in this case. In particular, we will pay attention to the ROE of Ever Harvest Group Holdings today.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simple terms, it is used to assess the profitability of a company in relation to its equity.
See our latest analysis for Ever Harvest Group Holdings
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Ever Harvest Group Holdings is:
12% = HK$23 million ÷ HK$197 million (based on trailing 12 months to December 2021).
The “return” is the annual profit. So this means that for every HK$1 investment of its shareholder, the company generates a profit of HK$0.12.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits 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 unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Earnings growth at Ever Harvest Group Holdings and ROE of 12%
For starters, Ever Harvest Group Holdings’ ROE looks acceptable. Regardless, the company’s ROE is still well below the industry average of 27%. That said, the significant five-year net profit growth of 71% reported by Ever Harvest Group Holdings is a pleasant surprise. We believe there could be other factors at play here. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio. Keep in mind that the company has a respectable ROE. It’s just that the industry’s ROE is higher. So that certainly provides some context to the strong earnings growth the company is seeing.
We then compared the growth of Ever Harvest Group Holdings net income with the industry and we are happy to see that the growth figure of the company is higher compared to the industry which has a growth rate of 44% over the same period.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. 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 if Ever Harvest Group Holdings is trading on a high P/E or a low P/E, relative to its industry.
Does Ever Harvest Group Holdings effectively reinvest its earnings?
Ever Harvest Group Holdings does not pay any dividends to its shareholders, which means that the company has reinvested all of its profits back into the business. This is probably what explains the strong earnings growth discussed above.
Overall, we are quite satisfied with the performance of Ever Harvest Group Holdings. In particular, we appreciate the fact that the company reinvests heavily in its business at a moderate rate of return. Unsurprisingly, this led to impressive earnings growth. If the company continues to increase its earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Let’s not forget that business risk is also one of the factors that affect the stock price. This is therefore also an important area for investors to pay attention to before making a decision on a company. You can see the 4 risks we have identified for Ever Harvest Group Holdings by visiting our risk dashboard for free on our platform here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.