Most readers will already know that shares of Twintek Investment Holdings (HKG:6182) are up a significant 11% over the past week. However, we decided to pay attention to the fundamentals of the company which do not seem to give a clear indication of the financial health of the company. In this article, we have decided to focus on the ROE of Twintek Investment 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.
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How is ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Twintek Investment Holdings is:
8.8% = HK$14 million ÷ HK$156 million (based on trailing 12 months to March 2022).
“Yield” refers to a company’s earnings 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$0.09.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Twintek Investment Holdings earnings growth and ROE of 8.8%
At first glance, the ROE of Twintek Investment Holdings is not much to tell. Although further investigation shows that the company’s ROE is above the industry average of 6.8%, which we certainly cannot ignore. However, Twintek Investment Holdings’ five-year net income decline rate was 12%. Keep in mind that the company has a slightly low ROE. It’s just that the industry’s ROE is lower. Therefore, this partly explains the drop in income.
Moreover, even when compared to the industry, which cut profits at a rate of 1.6% over the same period, we found that the performance of Twintek Investment Holdings is quite disappointing, as it suggests that the company cut profits at a faster rate than the industry.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about the valuation of Twintek Investment Holdings, check out this indicator of its price/earnings ratio, relative to its sector.
Does Twintek Investment Holdings use its profits efficiently?
Twintek Investment Holdings’ earnings decline is not surprising given that the company spends the bulk of its earnings on paying dividends, judging by its three-year median payout ratio of 87% (or a 13% retention). The company has only a small pool of capital left to reinvest – A vicious cycle that does not benefit the company in the long term. To learn about the 4 risks we have identified for Twintek Investment Holdings, visit our risk dashboard for free.
Additionally, Twintek Investment Holdings only recently started paying a dividend. So it seems that management perceived that shareholders favored dividends even though profits were down.
Overall, we have mixed feelings about Twintek Investment Holdings. On the one hand, the company has a decent rate of return, however, its earnings growth figure is quite disappointing and, as mentioned earlier, low retained earnings are hampering growth. So far, we have only had a brief discussion of corporate earnings growth. To better understand Twintek Investment Holdings’ past earnings growth, check out this visualization of past earnings, revenue, and cash flow.
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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.
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