The fundamentals of LK Technology Holdings Limited (HKG:558) look quite solid: could the market be wrong about the stock?
LK Technology Holdings (HKG:558) had a tough three months with its share price down 34%. However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. In this article, we decided to focus on the ROE of LK Technology Holdings.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest analysis for LK Technology Holdings
How is ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for LK Technology Holdings is:
16% = HK$554 million ÷ HK$3.4 billion (based on trailing 12 months to September 2021).
“Yield” is the income the business has earned over the past year. So this means that for every HK$1 of investment by its shareholder, the company generates a profit of HK$0.16.
Why is ROE important for earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. 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.
LK Technology Holdings earnings growth and ROE of 16%
For starters, LK Technology Holdings appears to have a respectable ROE. Especially when compared to the industry average of 9.9%, the company’s ROE looks quite impressive. This likely laid the foundation for LK Technology Holdings’ moderate 18% net income growth over the past five years.
As a next step, we benchmarked LK Technology Holdings’ net income growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 18% over the past of the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. 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. Is LK Technology Holdings correctly valued relative to other companies? These 3 assessment metrics might help you decide.
Does LK Technology Holdings use its profits efficiently?
LK Technology Holdings has a three-year median payout ratio of 27%, implying that it keeps the remaining 73% of its earnings. This suggests that its dividend is well covered and, given the decent growth the company has seen, it looks like management is reinvesting its earnings effectively.
Additionally, LK Technology Holdings is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years. Our latest analyst data shows that the company’s future payout ratio is expected to drop to 13% over the next three years. As a result, the expected decline in LK Technology Holdings’ payout ratio explains the company’s anticipated future ROE rise to 20% over the same period.
Overall, we are quite satisfied with the performance of LK Technology Holdings. In particular, it is good to see that the company is investing heavily in its business, and together with a high rate of return, this has led to significant growth in its profits. That said, looking at current analyst estimates, we have seen that the company’s earnings are expected to accelerate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.