CK Infrastructure Holdings Limited (HKG: 1038) on an uptrend but financial outlook looks rather weak: is the stock overvalued?

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CK Infrastructure Holdings (HKG: 1038) has had an excellent performance in the equity market with a significant increase in its share of 12% in the past three months. However, we wanted to take a closer look at its key financial metrics as markets typically pay for long-term fundamentals, and in this case, they don’t look very promising. Specifically, we have decided to study the ROE of CK Infrastructure Holdings in this article.

Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.

See our latest analysis for CK Infrastructure Holdings

How is the ROE calculated?

the return on equity formula is:

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

Thus, based on the above formula, the ROE of CK Infrastructure Holdings is:

6.5% = HK $ 7.5 billion ÷ HK $ 115 billion (based on the last twelve months to June 2021).

The “return” is the annual profit. So this means that for every HK $ 1 invested by its shareholder, the company generates a profit of HK $ 0.07.

Why is ROE important for profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess the profits that the business is reinvesting or “withholding” for future growth, which then gives us an idea of ​​the growth potential of the business. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.

A Side-by-Side Comparison of CK Infrastructure Holdings’ Profit Growth and 6.5% ROE

At first glance, CK Infrastructure Holdings’ ROE does not look so attractive. Still, further study shows that the company’s ROE is similar to the industry average of 7.0%. But CK Infrastructure Holdings has recorded a decline in five-year net income of 6.6% over the past five years. Remember that the ROE of the company is a little low to begin with. Hence, lower income could also be the result of this.

Then, comparing with the industry’s net income growth, we found that CK Infrastructure Holdings’ profits appear to be declining at a rate similar to that of the industry which has declined at a rate of 7.3% over the course of from the same period.

SEHK: 1038 Past profit growth on December 26, 2021

Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. Is 1038 fair rated? This intrinsic business value infographic has everything you need to know.

Is CK Infrastructure Holdings Efficiently Reinvesting Profits?

CK Infrastructure Holdings’ decline in earnings is not surprising given how the company spends most of its earnings on dividend payments, judging by its three-year median payout rate of 59% (or a 41% retention rate). The company has only a small reserve of capital to reinvest – a vicious cycle that does not benefit the company in the long run.

Additionally, CK Infrastructure Holdings has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 65% of its profits over the next three years. However, CK Infrastructure Holdings’ ROE is expected to increase to 8.2% despite no expected change in its payout ratio.

Conclusion

All in all, we would have thought well before deciding on any investment action regarding CK Infrastructure Holdings. Because the company does not reinvest much in the business and given the low ROE, it is not surprising that there is no or no growth in its earnings. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.


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