Pacific Millennium Packaging Group’s (HKG:1820) stock up by 8.9% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Pacific Millennium Packaging Group’s ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Pacific Millennium Packaging Group is:
13% = CN¥81m ÷ CN¥641m (Based on the trailing twelve months to June 2020).
The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.13 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
Pacific Millennium Packaging Group’s Earnings Growth And 13% ROE
To start with, Pacific Millennium Packaging Group’s ROE looks acceptable. Further, the company’s ROE compares quite favorably to the industry average of 6.6%. This probably laid the ground for Pacific Millennium Packaging Group’s moderate 12% net income growth seen over the past five years.
We then compared Pacific Millennium Packaging Group’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 6.7% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. One 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 prospects. So, you may want to check if Pacific Millennium Packaging Group is trading on a high P/E or a low P/E, relative to its industry.
Is Pacific Millennium Packaging Group Making Efficient Use Of Its Profits?
With a three-year median payout ratio of 33% (implying that the company retains 67% of its profits), it seems that Pacific Millennium Packaging Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.
Along with seeing a growth in earnings, Pacific Millennium Packaging Group only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 25% over the next three years. Despite the lower expected payout ratio, the company’s ROE is not expected to change by much.
On the whole, we feel that Pacific Millennium Packaging Group’s performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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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