Should weakness in Uni-President China Holdings Ltd (HKG:220) shares be taken as a sign that the market will correct the share price given decent financials?

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With its shares down 12% over the past three months, it’s easy to overlook Uni-President China Holdings (HKG: 220). But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In particular, we will pay attention to the ROE of Uni-President China Holdings today.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

Check out our latest analysis for Uni-President China Holdings

How to calculate return on equity?

The return on equity formula is:

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

So, based on the above formula, the ROE for Uni-President China Holdings is:

11% = CN¥1.5b ÷ CN¥14b (Based on trailing twelve months to December 2021).

“Yield” is the income the business has earned over the past year. This therefore means that for each investment of 1 HK$ invested by its shareholder, the company generates a profit of 0.11 HK$.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Uni-President China Holdings’ earnings growth and 11% ROE

At first glance, Uni-President China Holdings appears to have a decent ROE. And comparing with the industry, we found that the industry average ROE is similar at 9.5%. This certainly adds some context to Uni-President China Holdings’ moderate 19% net income growth seen over the past five years.

Then, comparing with the industry net income growth, we found that the growth of Uni-President China Holdings is quite high compared to the industry average growth of 7.4% during the same period, which is great to see.

SEHK: 220 Past Earnings Growth June 17, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. 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. Thus, you might want to check whether Uni-President China Holdings is trading on a high P/E or on a low P/E, relative to its industry.

Does Uni-President China Holdings effectively reinvest its profits?

While Uni-President China Holdings has a three-year median payout ratio of 100% (meaning it retains 0.001% of earnings), the company has still experienced significant earnings growth in the past, meaning that its high payout ratio hasn’t hindered its ability to grow.

Additionally, Uni-President China Holdings is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 101%. Either way, Uni-President China Holdings’ future ROE is expected to hit 15% despite little change expected in its payout ratio.

Conclusion

All in all, it seems that Uni-President China Holdings has some positive aspects of its business. Namely, its strong earnings growth, which was likely due to its high ROE. However, investors could have benefited even more from the high ROE if the company had reinvested more of its profits. As stated earlier, the company retains virtually none of its profits. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

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.

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