Towngas China (HKG: 1083) has had an excellent performance in the equity market with a significant increase in its shares of 18% over the past month. As most know, fundamentals generally guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. Specifically, we have decided to study the ROE of Towngas China in this article.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for Towngas China
How is the ROE calculated?
the formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of Towngas China is:
8.2% = HK $ 1.9 billion Ã· HK $ 23 billion (based on the last twelve months to June 2021).
The “return” is the profit of the last twelve months. So this means that for every HK $ 1 invested by its shareholder, the company generates a profit of HK $ 0.08.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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 Towngas China’s earnings growth and 8.2% ROE
At first glance, Towngas China’s ROE does not look very promising. Then, compared to the industry average ROE of 15%, the company’s ROE leaves us even less enthusiastic. However, we can see that Towngas China has experienced modest growth in net income of 9.0% over the past five years. We think there might be other factors at play here. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
Then, comparing with the industry’s net income growth, we found that Towngas China’s reported growth was lower than the industry’s growth by 12% during the same period, which is not something we love to see.
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. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check whether Towngas China is trading high P / E or low P / E, relative to its industry.
Is Towngas China Efficiently Reinvesting Its Profits?
Towngas China has a three-year median payout rate of 32%, which means it keeps the remaining 68% of its profits. This suggests that its dividend is well hedged and, given the decent growth of the company, it appears that management is reinvesting its earnings in an efficient manner.
In addition, Towngas China is determined to continue to share its profits with its shareholders, which we can deduce from its long history of paying dividends for at least ten years. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 27%. As a result, Towngas China’s ROE is not expected to change much either, which we have deduced from analysts’ estimate of 9.0% for future ROE.
All in all, it seems that Towngas China has positive aspects for its activities. That is, decent profit growth supported by a high reinvestment rate. However, we believe that profit growth could have been higher if the company had improved due to the low ROE rate. Especially considering the way the company reinvests a huge chunk of its profits. That said, the latest forecasts from industry analysts show that the company’s profits are expected to pick up. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to 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 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 documents. Simply Wall St has no position in any of the stocks mentioned.