Yee Hop Holdings (HKG:1662) has had a strong run in the stock market with a significant 16% increase in its shares over the past three months. But the company’s key financial indicators seem to differ across the board, leading us to wonder whether the company’s current share price momentum can be sustained or not. In this article, we decided to focus on the ROE of Yee Hop Holdings.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for Yee Hop Holdings
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Yee Hop Holdings is:
1.4% = HK$7.1 million ÷ HK$492 million (based on trailing 12 months to September 2021).
“Yield” is the income the business has earned over the past year. Another way to think about this is that for every HK$1 of equity, the company was able to make a profit of HK$0.01.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. 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.
A side-by-side comparison of Yee Hop Holdings’ earnings growth and ROE of 1.4%
As you can see, Yee Hop Holdings’ ROE looks quite low. Not only that, even compared to the industry average of 8.0%, the company’s ROE is quite unremarkable. Therefore, it may not be wrong to say that the 4.6% decline in net income over five years observed by Yee Hop Holdings was possibly the result of a lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, the company has misallocated capital or the company has a very high payout ratio.
With industry profits declining at a rate of 4.6% over the same period, we infer that the company and the industry are shrinking at the same rate.
Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. Is Yee Hop Holdings correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does Yee Hop Holdings Reinvest Earnings Effectively?
Yee Hop Holdings does not pay any dividends, which means that potentially all of its profits are reinvested in the company, which does not explain why the company’s profits have decreased if it retains all of its profits. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.
Overall, we have mixed feelings about Yee Hop Holdings. Even though it seems to keep most of its profits, given the low ROE, investors may not be benefiting from all that reinvestment after all. Weak earnings growth suggests our theory is correct. In conclusion, we would proceed with caution with this business and one way to do that would be to review the risk profile of the business. Our risk dashboard would have the 4 risks we identified for Yee Hop Holdings.
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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.