Are Strong Financial Prospects The Force That Is Driving The Momentum In Haidilao International Holding Ltd.'s HKG:6862) Stock?

Simply Wall St · 10/14 23:50

Most readers would already be aware that Haidilao International Holding's (HKG:6862) stock increased significantly by 34% over the past month. 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 Haidilao International Holding's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Haidilao International Holding

How Is ROE Calculated?

The formula for ROE is:

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

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

45% = CN¥4.3b ÷ CN¥9.5b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.45 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Haidilao International Holding's Earnings Growth And 45% ROE

To begin with, Haidilao International Holding has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 6.8% also doesn't go unnoticed by us. Under the circumstances, Haidilao International Holding's considerable five year net income growth of 21% was to be expected.

As a next step, we compared Haidilao International Holding's 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 12%.

past-earnings-growth
SEHK:6862 Past Earnings Growth October 14th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is 6862 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Haidilao International Holding Efficiently Re-investing Its Profits?

The three-year median payout ratio for Haidilao International Holding is 27%, which is moderately low. The company is retaining the remaining 73%. By the looks of it, the dividend is well covered and Haidilao International Holding is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Haidilao International Holding has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 81% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

Overall, we are quite pleased with Haidilao International Holding's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.