Is the mixed financial data of Hong Kong and China Gas Company Limited (HKG: 3) the reason for its dismal performance in the stock market?

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It’s hard to get excited after looking at the recent performance of Hong Kong and China Gas (HKG: 3), as its stock has fallen 6.6% in the past three months. It seems that the market has completely ignored the positive aspects of the company’s fundamentals and decided to weigh more heavily on the negative aspects. Fundamentals usually dictate market outcomes, so it makes sense to study company finances. In this article, we have decided to focus on the ROE of Hong Kong and China Gas.

Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.

Check out our latest analysis for Hong Kong and China Gas

How is the 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 Hong Kong and China Gas is:

11% = HK $ 8.9 billion ÷ HK $ 80 billion (based on the last twelve months to June 2021).

The “return” is the amount earned after tax over the past twelve months. So this means that for every HK $ 1 invested by its shareholder, the company generates a profit of HK $ 0.11.

What does ROE have to do with profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the business is reinvesting or “holding back” 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.

Hong Kong and China Gas profit growth and 11% ROE

At first glance, Hong Kong and China Gas seem to have a decent ROE. Even so, compared to the industry average ROE of 15%, we’re not very excited. Needless to say, the 3.5% net income shrinkage rate seen by Hong Kong and China Gas over the past five years is a huge drag. Keep in mind that the business has a high ROE. It’s just that the industry’s ROE is higher. Therefore, lower profits could be the result of other factors. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.

So, in the next step, we compared the performance of Hong Kong and China Gas to that of the industry and were disappointed to find that as the company reduced its profits, the industry increased its profits to a low. rate of 12% in the same period.

SEHK: 3 Past profit growth on November 26, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. 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 whether Hong Kong and China Gas are trading high P / E or low P / E, relative to its industry.

Are Hong Kong and China Gas Efficiently Reinvesting Their Profits?

Hong Kong and China Gas has a high three-year median payout ratio of 84% (i.e. it keeps 16% 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 low or nonexistent.

Additionally, Hong Kong and China Gas have paid dividends over a period of at least ten years, which means the management of the company is committed to paying dividends even if it means little to no growth in earnings. 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 77%. Therefore, the company’s future ROE is also unlikely to change much, with analysts predicting an ROE of 13%.

Summary

All in all, we are a little ambivalent about the performance of Hong Kong and China Gas. We are mainly disappointed to see a lack of earnings growth despite a moderate ROE. Remember that the company reinvests a small part of its profits, which explains the lack of growth. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. 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.

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 shares 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 material. Simply Wall St has no position in any of the stocks mentioned.

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