A.Plus Group Holdings (HKG: 1841) has had an excellent performance in the equity market with a significant increase in its shares of 43% in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . In this article, we have decided to focus on the ROE of A.Plus Group Holdings.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In simpler terms, it measures a company’s profitability relative to equity.
See our latest analysis for A.Plus Group Holdings
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE for A.Plus Group Holdings is:
17% = HK $ 28 million ÷ HK $ 161 million (based on the last twelve months up to March 2021).
The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every HK $ 1 of shareholder capital it has, the company made a profit of HK $ 0.17.
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 “withholding” for future growth, which then gives us an idea of the growth potential of the business. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
Profit growth of A.Plus Group Holdings and 17% ROE
For starters, the ROE of A.Plus Group Holdings seems acceptable. Additionally, the company’s ROE compares quite favorably to the industry average of 11%. Still, A.Plus Group Holdings has seen meager growth of 3.4% over the past five years. This is usually not the case, because when a business has a high rate of return, it should generally also have a high rate of profit growth. Such a scenario is likely to occur when a company pays out a large portion of its profits as dividends or faces competitive pressures.
As a next step, we compared the net income growth of A.Plus Group Holdings with the industry and were disappointed to see that the growth of the company is below the industry average growth of 13% at during the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. 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 A.Plus Group Holdings is trading high P / E or low P / E, relative to its industry.
Is A.Plus Group Holdings Efficiently Using Retained Earnings?
Despite a moderate three-year median payout ratio of 27% (which implies the company keeps the remaining 73% of its revenue), A.Plus Group Holdings’ earnings growth has been quite weak. So there could be other factors at play here that could potentially hamper growth. For example, the company faced headwinds.
Additionally, A.Plus Group Holdings has paid dividends over a three-year period, which means the management of the company is committed to paying dividends even if it means little to no growth in earnings.
Overall, we think A.Plus Group Holdings has positive attributes. 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 3 risks we have identified for A.Plus Group Holdings, visit our free risk dashboard.
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