Shares of Tiangong International Company Limited (HKG:826) are on a bullish trend: Are strong financials guiding the market?

Most readers will already know that Tiangong International (HKG:826) stock is up a significant 31% over the past month. Since the market usually pays for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could influence the market. Specifically, we decided to study the ROE of Tiangong International in this article.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Our analysis indicates that 826 is potentially overrated!

How to calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Tiangong International is:

9.7% = 679 million Canadian yen ÷ 7.0 billion Canadian yen (based on the last twelve months to June 2022).

The “yield” is the profit of the last twelve months. This means that for every HK$1 of equity, the company generated HK$0.10 of profit.

Why is ROE important for earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

Tiangong International profit growth and ROE of 9.7%

For starters, Tiangong International’s ROE seems acceptable. Even compared to the industry average of 12%, the company’s ROE looks pretty decent. This certainly adds some context to Tiangong International’s outstanding 30% net income growth seen over the past five years. We believe that there could also be other aspects that positively influence the company’s earnings growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

We then performed a comparison of Tiangong International’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 29% over the same period. .

Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. Is Tiangong International correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Does Tiangong International use its profits effectively?

Tiangong International’s three-year median payout ratio is a rather moderate 30%, meaning the company retains 70% of its revenue. This suggests that its dividend is well covered, and given the strong growth we discussed above, it looks like Tiangong International is reinvesting its earnings effectively.

Additionally, Tiangong International is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years.

Conclusion

Overall, we believe Tiangong International’s performance has been quite good. In particular, it is good to see that the company is investing heavily in its business and, along with a high rate of return, this has resulted in significant growth in its profits. Looking at current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.