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Geely Automobile Holdings Limited’s (HKG:175) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

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Most readers would already be aware that Geely Automobile Holdings’ (HKG:175) stock increased significantly by 54% over the past three months. But the company’s key financial indicators appear to be differing across the board and that makes us question whether or not the company’s current share price momentum can be maintained. Particularly, we will be paying attention to Geely Automobile Holdings’ ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.

View our latest analysis for Geely Automobile Holdings

How Is ROE Calculated?

The formula for return on equity is:

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

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

6.2% = CN¥4.4b ÷ CN¥70b (Based on the trailing twelve months to December 2021).

The ‘return’ refers to a company’s earnings over the last year. One way to conceptualize this is that for each HK$1 of shareholders’ capital it has, the company made HK$0.06 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to 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 bear these characteristics.

A Side By Side comparison of Geely Automobile Holdings’ Earnings Growth And 6.2% ROE

At first glance, Geely Automobile Holdings’ ROE doesn’t look very promising. However, given that the company’s ROE is similar to the average industry ROE of 7.7%, we may spare it some thought. Having said that, Geely Automobile Holdings’ five year net income decline rate was 11%. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.

As a next step, we compared Geely Automobile Holdings’ performance with the industry and found thatGeely Automobile Holdings’ performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 5.3% in the same period, which is a slower than the company.

past-earnings-growth
SEHK:175 Past Earnings Growth August 8th 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Is 175 fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

Is Geely Automobile Holdings Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 30% (that is, a retention ratio of 70%), the fact that Geely Automobile Holdings’ earnings have shrunk is quite puzzling. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Geely Automobile Holdings has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 33%. However, Geely Automobile Holdings’ ROE is predicted to rise to 13% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we have mixed feelings about Geely Automobile Holdings. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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