Yahoo Finance Declining Stock and Decent Financials: Is The Market Wrong About HiTech Group Australia Limited (ASX:HIT)?
HiTech Group Australia (ASX:HIT) has had a rough three months with its share price down 6.5%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to HiTech Group Australia's ROE today.
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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for HiTech Group Australia
How To Calculate Return On Equity?
Return on equity 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 HiTech Group Australia is:
58% = AU$3.6m ÷ AU$6.3m (Based on the trailing twelve months to June 2021).
The 'return' is the profit over the last twelve months. That means that for every A$1 worth of shareholders' equity, the company generated A$0.58 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
HiTech Group Australia's Earnings Growth And 58% ROE
First thing first, we like that HiTech Group Australia has an impressive ROE. Secondly, even when compared to the industry average of 21% the company's ROE is quite impressive. Probably as a result of this, HiTech Group Australia was able to see a decent net income growth of 11% over the last five years.
Next, on comparing with the industry net income growth, we found that HiTech Group Australia's reported growth was lower than the industry growth of 17% in the same period, which is not something we like to see.
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. 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 HiTech Group Australia is trading on a high P/E or a low P/E, relative to its industry.
Is HiTech Group Australia Efficiently Re-investing Its Profits?
HiTech Group Australia has a significant three-year median payout ratio of 99%, meaning that it is left with only 1.1% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Besides, HiTech Group Australia has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders.
Summary
Overall, we feel that HiTech Group Australia certainly does have some positive factors to consider. As noted earlier, its earnings growth has been quite decent, and the high ROE does contribute to that growth. Still, the company invests little to almost none of its profits. This could potentially reduce the odds that the company continues to see the same level of growth in the future. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of HiTech Group Australia's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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