Pak Tak International (HKG: 2668) has had a good run in the stock market with its stock rising by a significant 38% over the last week. As most would know, this is basically what usually drives market price movements in the long run, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Pak Tak International’s ROE in this article.
Return on equity or ROE is a key measure used to assess how effectively a company’s management uses the company’s capital. In short, it is used to assess the profitability of a company in relation to its equity.
How is ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net profit (from continuing operations) ÷ Equity
So based on the above formula, ROE for Pak Tak International is:
6.3% = HK $ 30m ÷ HK $ 485m (Based on the subsequent twelve months to June 2020).
The ‘return’ is the income the company earned over the last year. So that means that for every HK $ 1 of its shareholder investment, the company generates a profit of HK $ 0.06.
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 must now evaluate how much profit the company reinvests or “preserves” for future growth, which then gives us an idea of the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and profits, the higher the growth of a company compared to companies that do not necessarily have these characteristics.
Pak Tak International’s earnings growth and 6.3% ROE
When you first look at it, Pak Tak International’s ROE does not look that attractive. However, its ROE corresponds to the industry average of 6.5%, so we will not completely lay off the company. Looking especially at Pak Tak International’s extraordinary 52-year net income growth, we are certainly impressed. Given the slightly low return on investment, it is likely that there may be some other aspects driving this growth. Such as – high earnings retention or effective management in place.
When you consider the fact that the industry’s earnings have fallen at a rate of 2.2% in the same period, the company’s net income growth is quite remarkable.
The basis for attaching value to a company is largely tied to its earnings growth. What investors need to determine next is whether the expected earnings growth or the lack of it is already built into the stock price. This then helps them determine if the stock is placed in a bright or gloomy 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 opportunities. So maybe you will check if Pak Tak International is trading at a high P / E or a low P / E, in relation to its industry.
Does Pak Tak International use its profits efficiently?
By and large, we feel that Pak Tak International has some positive qualities. With a high reinvestment, albeit at a low return on investment, the company has managed to see significant growth in its earnings. Even if we do not completely lay off the company, what we would do is try to determine how risky the company is to make a more informed decision about the company. To know the 3 risks we have identified for Pak Tak International, visit our risk dashboard for free.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by basic data. Please note that our analysis may not include the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in the mentioned stocks.
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