The fundamentals of KW Nelson Interior Design and Contracting Group Limited (HKG: 8411) look pretty strong: Could the market be wrong about the stock?

It’s hard to get excited after looking at the recent performance of KW Nelson Interior Design and Contracting Group (HKG: 8411), when its stock fell 12% in the past week. But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean the stock could potentially rise in the long term given how markets typically reward long-term fundamentals. more resistant term. In this article, we have decided to focus on the ROE of KW Nelson Interior Design and Contracting Group.

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. Simply put, it is used to assess a company’s profitability against its equity.

Check out our latest review for KW Nelson Interior Design and Contracting Group

How do you calculate return on equity?

The return on equity formula is:

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

Thus, based on the above formula, the ROE for KW Nelson Interior Design and Contracting Group is:

1.5% = HK $ 2.1 million ÷ HK $ 143 million (based on the last twelve months up to June 2021).

The “return” is the amount earned after tax over the past twelve months. So this means that for every HK $ 1 invested by its shareholder, the company generates a profit of HK $ 0.01.

What is the relationship between ROE and profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of ​​the growth potential of the company. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

A Side-by-Side Comparison of KW Nelson Interior Design and Contracting Group’s 1.5% Profit Growth and ROE

It is quite clear that the ROE of KW Nelson Interior Design and Contracting Group is rather low. Not only that, even compared to the industry average of 10%, the company’s ROE is quite unremarkable. However, we can see that KW Nelson Interior Design and Contracting Group has experienced modest net income growth of 7.9% over the past five years. We think there might be other factors at play here. For example, the business has a low payout ratio or is managed efficiently.

Then, comparing with the growth in net income of the industry, we found that the reported growth of KW Nelson Interior Design and Contracting Group was lower than the industry growth of 12% during the same period, this which is not something we like to see.

SEHK: 8411 Past profit growth on September 13, 2021

Profit growth is a huge factor in the valuation of stocks. 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 KW Nelson Interior Design and Contracting Group is trading high P / E or low P / E, relative to its industry.

Is KW Nelson Interior Design and Contracting Group Using Profits Efficiently?

KW Nelson Interior Design and Contracting Group’s three-year median payout ratio to shareholders is 9.3% (implying it keeps 91% of its revenue), which is lower, so it looks like management massively reinvest the profits to increase its Business.

In addition, KW Nelson Interior Design and Contracting Group paid dividends over a three-year period. This shows that the company is committed to sharing the profits with its shareholders.

Summary

All in all, it seems that KW Nelson Interior Design and Contracting Group has positive aspects for its business. Namely, her respectable profit growth, which she achieved by keeping most of her profits. However, given the low ROE, investors may not benefit from all of this reinvestment after all. 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 KW Nelson Interior Design and Contracting Group, 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 shares 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 the mentioned stocks.
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