AAC Technologies Holdings Inc. (HKG: 2018) shares rally, but finance looks ambiguous: will momentum continue?
AAC Technologies Holdings (HKG: 2018) has seen strong growth in the equity market with stock rising 10% in the past three months. However, we have decided to pay attention to the fundamentals of the company which do not seem to give a clear sign on the financial health of the company. In particular, we will pay particular attention to the ROE of AAC Technologies Holdings today.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by shareholders to the company.
Check out our latest analysis for AAC Technologies Holdings
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE for AAC Technologies Holdings is:
9.1% = CN ¥ 2.0b ÷ CN ¥ 22b (Based on the last twelve months up to March 2021).
The “return” is the annual profit. So this means that for every Hong Kong dollar invested by its shareholder, the company generates a profit of 0.09 Hong Kong dollar.
What does ROE have to do with profit growth?
We have already established that ROE serves as an effective gauge to generate profit for the future profits of a business. Based on how much of that profit the company reinvests or “withholds”, and how effectively it does so, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate compared to companies that do not. the same characteristics.
9.1% profit growth and ROE of AAC Technologies Holdings
At first glance, the ROE of AAC Technologies Holdings isn’t much to say. Still, further study shows that the company’s ROE is similar to the industry average of 8.0%. But then again, AAC Technologies Holdings’ five-year net income declined at a rate of 17%. Keep in mind that the business has a slightly low ROE. So that’s what could cause earnings growth to contract.
That being said, we compared the performance of AAC Technologies Holdings to that of the industry and became concerned when we found that even though the company had cut profits, the industry had increased profits at a rate 1.6% over the same period.
Profit growth is an important factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for 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 outlook. So, you might want to check if AAC Technologies Holdings is trading high P / E or low P / E, relative to its industry.
Is AAC Technologies Holdings Using Profits Efficiently?
Despite a normal three-year median payout ratio of 40% (where it retains 60% of its profits), AAC Technologies Holdings has seen its profits decline, as we saw above. So there could be other factors at play here that could potentially hamper growth. For example, the company faced headwinds.
In addition, AAC Technologies Holdings has paid dividends over a period of at least ten years, suggesting that sustaining dividend payments is much more important to management, even if it comes at the expense of growing the business. ‘business. Our latest analyst data shows the company’s future payout ratio is expected to drop to 27% over the next three years. The fact that the company’s ROE is expected to drop to 13% over the same period is explained by the drop in the payout ratio.
Overall, we have mixed feelings about AAC Technologies Holdings. Although the company has a high reinvestment rate, the low ROE means that all that reinvestment does not yield any benefit to its investors, and moreover, it has a negative impact on profit growth. However, the latest forecast from industry analysts shows that analysts expect a significant improvement in the company’s earnings growth rate. Are these analyst expectations based on general industry expectations or on company fundamentals? Click here to go to our business analyst’s forecast page.
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