It’s hard to get excited after looking at the recent performance of Kingboard Laminates Holdings (HKG: 1888), as its stock has fallen 15% in the past month. However, stock prices are usually determined by a company’s long-term financial data, which in this case looks pretty respectable. In particular, we will be paying particular attention to the ROE of Kingboard Laminates Holdings today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by shareholders to the company.
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How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Kingboard Laminates Holdings is:
20% = HK $ 2.8B ÷ HK $ 14B (based on the last twelve months up to December 2020).
The “return” is the annual profit. This means that for every HK $ 1 worth of equity, the company generated HK $ 0.20 in profit.
What is the relationship between ROE and profit growth?
We have already established that ROE serves as an effective gauge to generate profit for the future profits of a business. We now need to assess how much profit the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Kingboard Laminates Holdings Earnings Growth and ROE of 20%
For starters, Kingboard Laminates Holdings appears to have a respectable ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 8.0%. For this reason, the 3.0% drop in Kingboard Laminates Holdings’ net income over five years raises the question of why the high ROE did not translate into earnings growth. Therefore, there could be other aspects that could explain this. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.
However, when we compared the growth of Kingboard Laminates Holdings to that of the industry, we found that while the company’s profits were declining, the industry saw profit growth of 1.6% over the past year. same period. It is quite worrying.
Profit growth is an important metric to consider when valuing a stock. The investor should try to determine whether the expected growth or decline in earnings, whatever the case, is taken into account. In doing so, he will have an idea if the title is heading for clear blue waters or marshy waters ahead. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So you might want to check if Kingboard Laminates Holdings is trading high P / E or low P / E, relative to its industry.
Is Kingboard Laminates Holdings Efficiently Reinvesting Profits?
Kingboard Laminates Holdings has a high three-year median payout ratio of 54% (i.e. it keeps 46% 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 bit of being reinvested in the business, earnings growth would obviously be low or nonexistent. You can see the 2 risks we have identified for Kingboard Laminates Holdings by visiting our risk dashboard for free on our platform here.
Additionally, Kingboard Laminates Holdings has been paying dividends for at least a decade or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 44%. Still, forecasts suggest that Kingboard Laminates Holdings’ future ROE will increase to 32%, although the company’s payout ratio is not expected to change much.
Overall, we think Kingboard Laminates Holdings certainly has some positive factors to consider. However, we are disappointed to see a lack of earnings growth even despite a high ROE. Keep in mind that the company reinvests a small portion of its profits, which means investors do not take advantage of the high rate of return. That said, looking at current analysts’ estimates, we saw that the company’s earnings growth rate is expected to improve dramatically. 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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