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Declining Stock and Solid Fundamentals: Is The Market Wrong About Xinyi Glass Holdings Limited (HKG:868)?

Simply Wall St ·  10/23/2023 08:03

It is hard to get excited after looking at Xinyi Glass Holdings' (HKG:868) recent performance, when its stock has declined 18% over the past three months. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Xinyi Glass Holdings' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Xinyi Glass Holdings

How To Calculate Return On Equity?

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 Xinyi Glass Holdings is:

13% = HK$4.0b ÷ HK$32b (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.13 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Xinyi Glass Holdings' Earnings Growth And 13% ROE

To start with, Xinyi Glass Holdings' ROE looks acceptable. Even when compared to the industry average of 11% the company's ROE looks quite decent. This certainly adds some context to Xinyi Glass Holdings' moderate 13% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Xinyi Glass Holdings' growth is quite high when compared to the industry average growth of 9.1% in the same period, which is great to see.

past-earnings-growth
SEHK:868 Past Earnings Growth October 23rd 2023

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is 868 worth today? The intrinsic value infographic in our free research report helps visualize whether 868 is currently mispriced by the market.

Is Xinyi Glass Holdings Making Efficient Use Of Its Profits?

Xinyi Glass Holdings has a three-year median payout ratio of 50%, which implies that it retains the remaining 50% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Xinyi Glass Holdings has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 43% of its profits over the next three years. Still, forecasts suggest that Xinyi Glass Holdings' future ROE will rise to 18% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, we are pretty happy with Xinyi Glass Holdings' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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