Consumer services

Is the recent performance of Tokyo Chuo Auction Holdings Limited (HKG:1939) supported by weak financials?

With its shares down 18% over the past month, it’s easy to overlook Tokyo Chuo Auction Holdings (HKG: 1939). We decided to study the company’s financial statements to determine if the downward trend will continue, as a company’s long-term performance usually dictates market results. In this article, we decided to focus on the ROE of Tokyo Chuo Auction Holdings.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simple terms, it is used to assess the profitability of a company in relation to its equity.

See our latest analysis for Tokyo Chuo Auction Holdings

How do you calculate return on equity?

Return on equity can be calculated using the formula:

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

So, based on the above formula, the ROE for Tokyo Chuo Auction Holdings is:

8.8% = HK$26 million ÷ HK$293 million (based on trailing 12 months to September 2021).

“Yield” refers to a company’s earnings over the past year. Another way to think about this is that for every HK$1 of equity, the company was able to make a profit of HK$0.09.

What is the relationship between ROE and earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Profit growth and ROE of 8.8% from Tokyo Chuo Auction Holdings

At first glance, Tokyo Chuo Auction Holdings’ ROE doesn’t have much to say. However, since the company’s ROE is similar to the industry average ROE of 9.8%, we can spare it some thought. But then again, Tokyo Chuo Auction Holdings’ five-year net profit fell 34%. Keep in mind that the company has a slightly low ROE. Therefore, lower revenue could also be the result.

So, as a next step, we benchmarked the performance of Tokyo Chuo Auction Holdings against the industry and were disappointed to find that while the company reduced profits, the industry increased profits at a rate of 15% over the same period. .

SEHK: 1939 Past Earnings Growth March 19, 2022

Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. A 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 outlook. So, you might want to check if Tokyo Chuo Auction Holdings is trading on a high P/E or a low P/E, relative to its industry.

Does Tokyo Chuo Auction Holdings Use Retained Earnings Effectively?

Tokyo Chuo Auction Holdings’ earnings decline is not surprising given that the company spends the bulk of its earnings on paying dividends, judging by its three-year median payout ratio of 54% (or a retention rate of 46%). With only a small portion reinvested in the business, earnings growth would obviously be weak or non-existent. You can see the 3 risks we have identified for Tokyo Chuo Auction Holdings by visiting our risk dashboard for free on our platform here.

Additionally, Tokyo Chuo Auction Holdings has paid dividends over a three-year period, meaning the company’s management is instead focused on maintaining its dividend payouts regardless of declining earnings.

Conclusion

Overall, the performance of Tokyo Chuo Auction Holdings is quite disappointing. Because the company does not reinvest much in the business and given the low ROE, it is not surprising to see the lack or absence of profit growth. So far, we have only made a short study of the company’s growth data. To better understand Tokyo Chuo Auction Holdings’ past earnings growth, check out this visualization of past earnings, revenue, and cash flow.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.