Has Tongcheng-Elong Holdings Limited’s (HKG:780) Impressive Stock Performance Got Anything to Do With Its Fundamentals? – Simply Wall St

Tongcheng-Elong Holdings’ (HKG:780) stock is up by a considerable 42% over the past three months. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Tongcheng-Elong Holdings’ ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.

View our latest analysis for Tongcheng-Elong Holdings

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Tongcheng-Elong Holdings is:

2.3% = CN¥326m ÷ CN¥14b (Based on the trailing twelve months to December 2020).

The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every HK$1 of its shareholder’s investments, the company generates a profit of HK$0.02.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Tongcheng-Elong Holdings’ Earnings Growth And 2.3% ROE

It is quite clear that Tongcheng-Elong Holdings’ ROE is rather low. Even compared to the average industry ROE of 4.8%, the company’s ROE is quite dismal. In spite of this, Tongcheng-Elong Holdings was able to grow its net income considerably, at a rate of 50% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Tongcheng-Elong Holdings’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 23%.

past-earnings-growth
SEHK:780 Past Earnings Growth April 29th 2021

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. What is 780 worth today? The intrinsic value infographic in our free research report helps visualize whether 780 is currently mispriced by the market.

Is Tongcheng-Elong Holdings Making Efficient Use Of Its Profits?

Summary

Overall, we feel that Tongcheng-Elong Holdings certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.

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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 stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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