Is the recent performance of Tiangong International Company Limited (HKG:826) shares related to its strong fundamentals?

Tiangong International (HKG:826) has had a strong run in the equity market with a significant 17% rise in its shares over the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. In this article, we decided to focus on the ROE of Tiangong International.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for Tiangong International

How do you calculate return on equity?

The return on equity formula is:

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

So, based on the above formula, the ROE for Tiangong International is:

9.7% = 672 million Canadian yen ÷ 6.9 billion domestic yen (based on the last twelve months to December 2021).

The “return” is the annual profit. This means that for every HK$1 of equity, the company generated HK$0.10 of profit.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending 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 things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Tiangong International profit growth and ROE of 9.7%

For starters, Tiangong International seems to have a respectable ROE. Regardless, the company’s ROE is still well below the industry average of 12%. That said, the significant net income growth of 34% over five years reported by Tiangong International is a pleasant surprise. Therefore, there could be other causes behind this growth. 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. Keep in mind that the company has a respectable ROE. It’s just that the industry’s ROE is higher. So that certainly provides some context to the strong earnings growth the company is seeing.

As a next step, we benchmarked Tiangong International’s net income growth with the industry, and fortunately, we found that the growth the company saw was higher than the industry average growth of 24%.

SEHK: 826 Past Earnings Growth June 20, 2022

Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. 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 Tiangong International is trading on a high P/E or a low P/E, relative to its industry.

Does Tiangong International use its profits effectively?

Tiangong International’s three-year median payout ratio is a rather moderate 30%, meaning the company retains 70% of its revenue. On the face of it, the dividend is well covered and Tiangong International is effectively reinvesting its earnings, as evidenced by its exceptional growth discussed above.

Additionally, Tiangong International is committed to continuing to share its profits with shareholders, which we infer 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 remain stable at 30%. However, Tiangong International’s ROE is expected to reach 12% despite no expected change in its payout ratio.

Conclusion

Overall, we believe Tiangong International’s performance has been quite good. Specifically, we like that he reinvested a large portion of his profits at a moderate rate of return, which resulted in increased profits. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Ian Crawford

Check Also

Liverpool receive potential boost for Raphinha

Liverpool could ‘have the edge’ over Barcelona for the summer signing of Leeds United winger …