Smoore International Holdings Limited (HKG:6969) stock is doing well: is the market following the fundamentals?
Shares of Smoore International Holdings (HKG:6969) rose 5.1% over the past week. Since the market usually pays for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could influence the market. Specifically, we decided to study the ROE of Smoore International Holdings in this article.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for Smoore International Holdings
How do you 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 Smoore International Holdings is:
29% = CN¥5.2b ÷ CN¥18b (Based on trailing twelve months to June 2021).
“Yield” is the income the business has earned over the past year. This means that for every HK$1 of equity, the company generated HK$0.29 of profit.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Smoore International Holdings earnings growth and 29% ROE
First, we appreciate that Smoore International Holdings has an impressive ROE. Additionally, the company’s ROE is above the industry average of 16%, which is quite remarkable. So the substantial 46% net income growth seen by Smoore International Holdings over the past five years is not too surprising.
We then compared the growth of net income of Smoore International Holdings with the industry and we are happy to see that the growth figure for the company is higher compared to the industry which has a growth rate of 6, 4% 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. What is 6969 worth today? The intrinsic value infographic in our free research report visualizes whether 6969 is currently being mispriced by the market.
Does Smoore International Holdings effectively reinvest its earnings?
Smoore International Holdings’ three-year median payout ratio is a fairly moderate 47%, meaning the company retains 53% of its revenue. On the face of it, the dividend is well covered and Smoore International Holdings is effectively reinvesting its earnings, as evidenced by its exceptional growth discussed above.
While Smoore International Holdings has seen earnings growth, it only recently started paying a dividend. Chances are the company has decided to impress new and existing shareholders with a dividend. Existing analyst estimates suggest the company’s future payout ratio is likely to drop to 36% over the next three years. The fact that the company’s ROE is expected to be 36% over the same period is explained by the drop in the payout ratio.
Overall, we believe the performance of Smoore International Holdings has been quite good. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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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.