Is CM Hi-Tech Cleanroom Limited's (HKG:2115) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Simply Wall St · 10/17 03:14

CM Hi-Tech Cleanroom's (HKG:2115) stock is up by a considerable 45% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to CM Hi-Tech Cleanroom's ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for CM Hi-Tech Cleanroom

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 CM Hi-Tech Cleanroom is:

14% = CN¥46m ÷ CN¥336m (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$0.14 in profit.

What Is The Relationship Between ROE And 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.

CM Hi-Tech Cleanroom's Earnings Growth And 14% ROE

At first glance, CM Hi-Tech Cleanroom seems to have a decent ROE. On comparing with the average industry ROE of 8.0% the company's ROE looks pretty remarkable. This certainly adds some context to CM Hi-Tech Cleanroom's exceptional 29% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

We then compared CM Hi-Tech Cleanroom'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 6.1% in the same 5-year period.

past-earnings-growth
SEHK:2115 Past Earnings Growth October 17th 2024

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. Is CM Hi-Tech Cleanroom fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is CM Hi-Tech Cleanroom Efficiently Re-investing Its Profits?

The three-year median payout ratio for CM Hi-Tech Cleanroom is 28%, which is moderately low. The company is retaining the remaining 72%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like CM Hi-Tech Cleanroom is reinvesting its earnings efficiently.

Moreover, CM Hi-Tech Cleanroom is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Summary

Overall, we are quite pleased with CM Hi-Tech Cleanroom's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 3 risks we have identified for CM Hi-Tech Cleanroom by visiting our risks dashboard for free on our platform here.