It is hard to get excited after looking at VPower Group International Holdings’ (HKG:1608) recent performance, when its stock has declined 15% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on VPower Group International Holdings’ ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
Check out our latest analysis for VPower Group International Holdings
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for VPower Group International Holdings is:
15% = HK$525m ÷ HK$3.5b (Based on the trailing twelve months to December 2020).
The ‘return’ is the income the business earned over the last year. That means that for every HK$1 worth of shareholders’ equity, the company generated HK$0.15 in profit.
Why Is ROE Important For Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
VPower Group International Holdings’ Earnings Growth And 15% ROE
At first glance, VPower Group International Holdings seems to have a decent ROE. Especially when compared to the industry average of 8.3% the company’s ROE looks pretty impressive. Probably as a result of this, VPower Group International Holdings was able to see a decent growth of 13% over the last five years.
As a next step, we compared VPower Group International Holdings’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 5.8%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is VPower Group International Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is VPower Group International Holdings Efficiently Re-investing Its Profits?
In VPower Group International Holdings’ case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 24% (or a retention ratio of 76%), which suggests that the company is investing most of its profits to grow its business.
Additionally, VPower Group International Holdings has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 25%. As a result, VPower Group International Holdings’ ROE is not expected to change by much either, which we inferred from the analyst estimate of 14% for future ROE.
Overall, we are quite pleased with VPower Group International Holdings’ performance. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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