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Valuetronics Holdings (SGX:BN2) stock has increased by 5.0% in the last three months. We decided to examine the company’s mix-bag of fundamentals in order to determine what it could mean for future shares prices. Stock prices are often correlated with a company’s long-term financial performance. Particularly, we will be paying close attention to Valuetronics Holdings’ ROE now

ROE, or return on equity, is a tool that allows you to evaluate how well a company generates returns from the capital it has received from shareholders. It’s used to evaluate the profitability of a business in relation to its equity capital.

See our latest analysis for Valuetronics Holdings

How is ROE calculated

The formula to calculate return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

The ROE for Valuetronics Holdings, as per the formula above, is:

8.6% = HK$115m ÷ HK$1.3b (Based on the trailing twelve months to September 2022).

The company’s’return’ refers to the amount earned after taxes over the past twelve months. This means that the company makes a profit of SGD0.09 for every SGD1 invested by its shareholders.

What is ROE important for earnings growth?

We have seen that ROE is an indicator of how efficient a company generates its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Valuetronics Holdings: Earnings Growth of 8.6%

Valuetronics Holdings ROE is not very appealing when you first glance at it. However, a deeper analysis shows that the ROE of Valuetronics Holdings is significantly higher than the 7.0% industry average. This is something we can’t ignore. Valuetronics Holdings had a 10% net income decline over the past five years. Keep in mind that the ROE is not very high for this company. The industry ROE is higher. That could be one factor that is causing earnings growth to slow.

We found that Valuetronics Holdings has been losing earnings, while the industry has experienced an 8.1% increase in earnings over the same time. This is quite alarming.

Stock valuation is heavily influenced by earnings growth. Next, investors must determine if earnings growth is expected or not. This will help them decide if the stock has a bright future or not. Are Valuetronics Holdings’ shares fairly valued in comparison to other companies? These 3 valuation measures might help you decide.

Are Valuetronics Holdings using its retained earnings effectively?

A high 3-year median payout ratio (53%), which means that 47% are retained, means that most Valuetronics Holdings profits are being paid out to shareholders. This explains the company’s declining earnings. Earnings growth would be very limited or non-existent if only a small portion of the profits were reinvested back into the business.

Valuetronics Holdings paid dividends for at most ten years. This means that even though it may not be a significant increase in earnings, the company’s leadership is determined to continue paying dividends.

Summary

Overall, we believe Valuetronics Holdings performance is open to interpretation. We are disappointed that earnings growth has not been as strong despite a modest ROE. Keep in mind that the company only reinvests a small percentage of its profits which is why there has been no growth. We did however find that the company’s expected earnings growth rate will increase by a lot based on current analyst expectations. These analysts’ expectations are based on broad industry expectations or the company’s core. Click here to be taken to our analyst’s forecasts page for the company.

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This article is by Simply Wall St. It is general in nature. Our commentary is based on historical data, analyst forecasts and other unbiased information. We do not intend to provide financial advice. This analysis does not represent a recommendation to purchase or sell any stock and it does not consider your objectives or financial situation. Our goal is to provide you with long-term, focused analysis based on fundamental data. Please note that our analysis might not include the most recent announcements from price-sensitive companies or qualitative material. Simply Wall St does not hold any position in the stocks mentioned.

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