Consumer services

Hephaestus Holdings Limited (HKG: 8173) shares are on an uptrend: is strong financial data driving the market?

Hephaestus Holdings (HKG: 8173) has had an excellent performance in the equity market with a significant increase in its share of 133% in the past three months. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s KPIs to see if they could influence the market. Specifically, we have decided to study the ROE of Hephaestus Holdings in this article.

Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.

Check out our latest review for Hephaestus Holdings

How is the ROE calculated?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Hephaestus Holdings is:

9.7% = 4.6 million Hong Kong dollars ÷ 47 million Hong Kong dollars (based on the last twelve months to September 2021).

The “return” is the profit of the last twelve months. This means that for every HK $ 1 worth of equity, the company generated HK $ 0.10 in profit.

What is the relationship between ROE and profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess how much profit the business is reinvesting or “holding back” for future growth, which then gives us an idea of ​​the growth potential of the business. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.

Hephaestus Holdings Earnings Growth and ROE of 9.7%

For starters, the ROE of Hephaestus Holdings seems acceptable. Additionally, the company’s ROE is similar to the industry average of 9.5%. This certainly adds context to the exceptional 70% net profit growth of Hephaestus Holdings observed over the past five years. However, other drivers could also be behind this growth. Such as – high profit retention or effective management in place.

We then compared the net income growth of Hephaestus Holdings with the industry and we are happy to see that the growth figure of the company is higher than that of the industry which has a growth rate of 14% at the during the same period.

SEHK: 8173 Past profit growth on December 8, 2021

Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. Is Hephaestus Holdings fair valued compared to other companies? These 3 evaluation measures could help you decide.

Is Hephaestus Holdings Efficiently Reinvesting Its Profits?

Hephaestus Holdings does not pay any dividends to its shareholders, which means the company has reinvested all of its profits in the business. This is probably what explains the high number of profit growth discussed above.

Summary

Overall, we are quite satisfied with the performance of Hephaestus Holdings. In particular, we like the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive profit growth. If the company continues to grow earnings like it has, it could have a positive impact on its stock price given the influence of earnings per share on long-term stock prices. Remember that the price of a stock also depends on the perceived risk. Therefore, investors should keep themselves informed of the risks involved before investing in a business. To learn about the 2 risks we have identified for Hephaestus Holdings, visit our free risk dashboard.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.