The share of Smart City Development Holdings (HKG: 8268) rose 11% in the past week. 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. In particular, we will be paying close attention to the ROE of Smart City Development Holdings today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
Check out our latest analysis for Smart City Development Holdings
How do you calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of Smart City Development Holdings is:
10% = HK $ 13 million HK $ 124 million (based on the last twelve months to September 2021).
“Return” refers to a company’s profits over the past year. So this means that for every HK $ 1 invested by its shareholder, the company generates a profit of HK $ 0.10.
What does ROE have to do with 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 âwithholdingâ for future growth, which then gives us an idea of ââthe 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 the 10% profit growth and ROE of Smart City Development Holdings
For starters, the ROE of Smart City Development Holdings seems acceptable. Additionally, the company’s ROE is similar to the industry average of 9.0%. As you might expect, the 55% drop in net income reported by Smart City Development Holdings is a bit of a surprise. So there could be other aspects that could explain this. These include low profit retention or poor capital allocation.
Moreover, even when compared to the industry, which cut its profits by 1.2% over the same period, we found that the performance of Smart City Development Holdings is quite disappointing, as it suggests that the company has is reducing its profits at a faster rate than the industry.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. 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 if Smart City Development Holdings is trading high P / E or low P / E, relative to its industry.
Are Smart City Development Holdings Using Profits Efficiently?
Smart City Development Holdings does not pay any dividends, which means that all of its profits are potentially reinvested in the business, which does not explain why the company’s profits have fallen if it keeps all of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business could be in decline.
All in all, it seems that Smart City Development Holdings has positive aspects for its activities. However, given the high ROE and high profit retention, we would expect the company to show strong profit growth, but this is not the case here. This suggests that there could be an external threat to the business, hampering its growth. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. To learn about the 4 risks we have identified for Smart City Development Holdings, visit our free risk dashboard.
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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.