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Financials from Shoucheng Holdings Limited (HKG:697) are too murky to relate to current stock price momentum: What’s in store for the stock?

Shares of Shoucheng Holdings (HKG:697) are up 9.7% over the past three months. However, we decided to study the mix of company fundamentals to assess what this might mean for future stock prices, as stock prices tend to be aligned with a company’s long-term financial performance. company. In this article, we decided to focus on the ROE of Shoucheng 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 short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Check out our latest analysis for Shoucheng Holdings

How to calculate return on equity?

The return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Shoucheng Holdings is:

8.2% = HK$881 million ÷ HK$11 billion (based on trailing 12 months to June 2022).

“Yield” is the income the business has earned over the past year. Another way to think about this is that for every HK$1 of equity, the company was able to make a profit of HK$0.08.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings 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.

Shoucheng Holdings earnings growth and ROE of 8.2%

At first glance, the ROE of Shoucheng Holdings is not much to say. However, the fact that the company’s ROE is higher than the industry average ROE of 6.8% is certainly interesting. But seeing Shoucheng Holdings’ five-year net income drop 25% over the past five years, we might rethink that. Remember that the company’s ROE is a bit low to start with, just that it’s above the industry average. So that could be one of the factors slowing earnings growth.

That being said, we compared the performance of Shoucheng Holdings with the industry and were concerned when we found that while the company had cut profits, the industry had increased profits at a rate of 5.7% in during the same period.

SEHK: 697 Past Earnings Growth Oct 22, 2022

Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about the valuation of Shoucheng Holdings, check out this indicator of its price-earnings ratio, relative to its sector.

Is Shoucheng Holdings using its profits efficiently?

Shoucheng Holdings’ earnings decline is not surprising given that the company spends the bulk of its earnings on paying dividends, judging by its three-year median payout ratio of 76% (or a 24% retention). With very little left to reinvest in the business, earnings growth is far from likely. To learn about the 2 risks we have identified for Shoucheng Holdings, visit our risk dashboard for free.

Moreover, Shoucheng Holdings has been paying dividends for four years, which is a considerable length of time, suggesting that management must have perceived that shareholders preferred consistent dividends even though profits had declined.

Summary

Overall, we have mixed feelings about Shoucheng Holdings. We are mainly disappointed to see a lack of earnings growth, even despite a moderate ROE. Remember that the company reinvests a small part of its profits, which explains the lack of growth. That said, we have studied the latest analyst forecasts and found that although the company has decreased earnings in the past, analysts expect earnings to increase in the future. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

Valuation is complex, but we help make it simple.

Find out if Shoucheng Holdings is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

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.