Shenzhen HeungKong Holding Co.,Ltd's (SHSE:600162) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

Simply Wall St · Jul 25, 2023 18:13

Shenzhen HeungKong HoldingLtd (SHSE:600162) has had a great run on the share market with its stock up by a significant 17% over the last three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Shenzhen HeungKong HoldingLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Shenzhen HeungKong HoldingLtd

How Is ROE Calculated?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Shenzhen HeungKong HoldingLtd is:

1.6% = CN¥110m ÷ CN¥6.8b (Based on the trailing twelve months to March 2023).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.02.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

A Side By Side comparison of Shenzhen HeungKong HoldingLtd's Earnings Growth And 1.6% ROE

It is hard to argue that Shenzhen HeungKong HoldingLtd's ROE is much good in and of itself. Not just that, even compared to the industry average of 5.0%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 26% seen by Shenzhen HeungKong HoldingLtd was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

So, as a next step, we compared Shenzhen HeungKong HoldingLtd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 0.1% over the last few years.

past-earnings-growth — SHSE:600162 Past Earnings Growth July 25th 2023

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Shenzhen HeungKong HoldingLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shenzhen HeungKong HoldingLtd Efficiently Re-investing Its Profits?

Shenzhen HeungKong HoldingLtd has a high three-year median payout ratio of 71% (that is, it is retaining 29% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. To know the 3 risks we have identified for Shenzhen HeungKong HoldingLtd visit our risks dashboard for free.

Additionally, Shenzhen HeungKong HoldingLtd has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we would be extremely cautious before making any decision on Shenzhen HeungKong HoldingLtd. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Shenzhen HeungKong HoldingLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.