Kingboard Laminates Holdings (HKG: 1888) shares have risen 16% in the past month. 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 Kingboard Laminates Holdings.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for Kingboard Laminates Holdings
How do you calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of Kingboard Laminates Holdings is:
33% = HK $ 5.4 billion Ã· HK $ 16 billion (based on the last twelve months to June 2021).
The “return” is the income the business has earned over the past year. So this means that for every HK $ 1 invested by its shareholder, the company generates a profit of HK $ 0.33.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess the profits that the business is reinvesting or âwithholdingâ for future growth, which then gives us an idea of ââthe 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.
A side-by-side comparison of Kingboard Laminates Holdings’ 33% profit growth and ROE
For starters, Kingboard Laminates Holdings has a pretty high ROE, which is interesting. In addition, the company’s ROE is above the industry average of 9.3%, which is quite remarkable. For this reason, the 3.7% drop in Kingboard Laminates Holdings’ net income over five years raises the question of why the high ROE has not translated into earnings growth. So there could be other aspects that could explain this. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.
So, in a next step, we compared the performance of Kingboard Laminates Holdings to that of the industry and were disappointed to find that if the company reduced its profits, the industry increased its profits at a rate of 1, 7% over 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. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. If you’re wondering how Kingboard Laminates Holdings is valued, check out this gauge of its price / earnings ratio, relative to its industry.
Is Kingboard Laminates Holdings Efficiently Using Its Retained Earnings?
Kingboard Laminates Holdings has a high three-year median payout rate of 53% (i.e. it keeps 47% of its profits). This suggests that the company pays most of its profits as dividends to its shareholders. This partly explains why its profits have declined. With only a little money reinvested in the business, earnings growth would obviously be little or no growth.
Additionally, Kingboard Laminates Holdings has paid dividends over a period of at least ten years, meaning the management of the company is committed to paying dividends even if it means little to no earnings growth. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 53% of its profits over the next three years. Therefore, the company’s future ROE is also unlikely to change much, with analysts predicting an ROE of 37%.
Overall, we think Kingboard Laminates Holdings certainly has some positive factors to consider. However, we are disappointed to see a lack of earnings growth despite a high ROE. Keep in mind that the company reinvests a small portion of its profits, which means investors do not reap the benefits of the high rate of return. However, the latest forecast from industry analysts shows that analysts expect a significant improvement in the company’s earnings growth rate. To learn more about the company’s future earnings growth forecast, take a look at 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 using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock 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 any of the stocks mentioned.