close
close

The shares of Haidilao International Holding Ltd. (HKG:6862) are on an uptrend: can fundamentals drive momentum?

Most readers will already be aware that shares of Haidilao International Holding (HKG:6862) are up significantly by 29% over the past three months. We wonder if and what role the company’s financials play in that price change, since a company’s long-term fundamentals typically drive market outcomes. Specifically, we decided to study Haidilao International Holding’s ROE in this article.

Return on equity or ROE is an important measure used to assess how efficiently a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the return on the capital provided by the company’s shareholders.

Check out our latest analysis for Haidilao International Holding

How to calculate return on equity?

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:

39% = CN¥4.5b ÷ CN¥12b (based on the last twelve months to December 2023).

The ‘return’ is the profit over the past twelve months. This means that for every HK$1 of equity, the company generated HK$0.39 in profit.

Why is ROE important for earnings growth?

So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company decides to reinvest or “retain”, we can then evaluate a company’s future ability to generate profits. 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 have these characteristics.

Earnings growth of Haidilao International Holding and 39% ROE

For starters, Haidilao International Holding has a pretty high ROE, which is interesting. Secondly, even compared to the industry average of 8.2%, the company’s ROE is quite impressive. Despite this, Haidilao International Holding’s five-year net profit growth has remained relatively flat over the past five years. Based on this, we believe that there may be other reasons not discussed so far in this article that could hinder the company’s growth. These include low profit retention or poor capital allocation

As a next step, we compared Haidilao International Holding’s performance with the industry and found that the industry has shrunk by 11% over the same period, meaning the company has shrunk its profits at a slower pace than the industry. While this isn’t particularly good, it isn’t particularly bad either.

SEHK:6862 Past earnings growth June 5, 2024

Earnings growth is a big factor in stock valuations. What investors need to determine next is whether expected earnings growth, or lack thereof, is already built into the stock price. By doing this, they will get an idea if the stock is headed to clear blue waters or if swampy waters await. Has the market taken into account the future prospects for 6862? You can read it in our latest infographic research report on intrinsic value.

Does Haidilao International Holding make effective use of retained earnings?

Haidilao International Holding’s low three-year average payout ratio of 17% (meaning the company retains 83% of profits) should mean that the company retains most of its profits and should therefore see higher growth than it has reported.

Moreover, Haidilao International Holding has been paying dividends for five years, which is a significant amount of time, suggesting that management must have understood that shareholders prefer dividends to earnings growth. Studying the latest analyst consensus data, we found that the company’s future payout ratio is expected to rise to 67% over the next three years. Despite the higher expected payout ratio, the company’s ROE is not expected to change much.

Conclusion

Overall, we believe that Haidilao International Holding certainly has some positive factors to consider. Still, the low earnings growth is somewhat concerning, especially considering the company has high returns and reinvests a large portion of its profits. From the looks of it, there may be other factors, not necessarily in the company’s control, that are hindering growth. That said, we looked at the latest analyst forecasts and found that while the company has shrunk its profits in the past, analysts expect profits to grow in the future. Are these analyst expectations based on broad industry expectations, or on the company’s fundamentals? Click here to visit our analysts’ forecast page for the company.

Valuation is complex, but we help make it simple.

Find out if Haidilao International Holding is potentially over or undervalued by checking out our comprehensive analysis, including: fair value estimates, risks and cautions, dividends, insider transactions and financial health.

View the Free Analysis

Do you have feedback on this article? Worried about the content? Please contact us directly from us. You can also email the editorial team (at) Simplywallst.com.

This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.