With its stock down 17% over the past three months, it’s easy to overlook Xinyi Glass Holdings (HKG: 868). But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. In this article, we decided to focus on the ROE of Xinyi Glass Holdings.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest analysis for Xinyi Glass Holdings
How do you calculate return on equity?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Xinyi Glass Holdings is:
33% = HK$12 billion ÷ HK$35 billion (based on trailing 12 months to December 2021).
“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every HK$1 of share capital it has, the company has made a profit of HK$0.33.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess 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.
Xinyi Glass Holdings profit growth and ROE of 33%
For starters, Xinyi Glass Holdings has a pretty high ROE, which is interesting. Second, a comparison to the average industry-reported ROE of 14% also does not go unnoticed for us. Under these circumstances, a considerable five-year net profit growth of Xinyi Glass Holdings of 25% was to be expected.
Then, comparing with the industry net income growth, we found that the growth of Xinyi Glass Holdings is quite high compared to the industry average growth of 11% over the same period, which is great to see.
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 Xinyi Glass Holdings fairly valued compared to other companies? These 3 assessment metrics might help you decide.
Does Xinyi Glass Holdings use its profits efficiently?
The three-year median payout ratio for Xinyi Glass Holdings is 50%, which is moderately low. The company retains the remaining 50%. This suggests that its dividend is well covered, and given the strong growth we discussed above, it looks like Xinyi Glass Holdings is reinvesting its earnings effectively.
Moreover, Xinyi Glass Holdings has paid dividends over a period of at least ten years, which means that the company is quite serious about sharing its profits with its shareholders. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out about 45% of its earnings over the next three years. Still, forecasts suggest that Xinyi Glass Holdings’ future ROE will drop to 22%, even though the company’s payout ratio isn’t expected to change much.
Overall, we are quite satisfied with the performance of Xinyi Glass Holdings. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. That said, in studying current analyst estimates, we were concerned that while the company has increased earnings in the past, analysts expect earnings to decline in the future. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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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.