Looking at Travelsky Technology's (HKG:696) recent performance, it's hard to get excited, with the share price down 24% over the past three months. It seems the market has completely ignored the positive aspects of the company's fundamentals and focused on the negative ones. Since fundamentals usually drive market outcomes, it makes sense to take a look at the company's financial position. In particular, we'll be looking at Travelsky Technology's ROE today.
Return on Equity (ROE) is a measure of how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio that measures the rate of return on the capital provided by a company's shareholders.
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How do you calculate return on equity?
Return on equity can be calculated using the following formula:
Return on Equity = Net Income (from continuing operations) / Shareholders' Equity
So, based on the above formula, TravelSky Technology's ROE is:
6.9% = CNY 1.4 billion / CNY 21 billion (Based on the trailing twelve months to December 2023).
“Return” is the profit after tax over the last 12 months, i.e. for every HK$1 of shareholders' capital, the company generated HK$0.07 in profits.
What is the relationship between ROE and earnings growth?
Thus far, we have learned that ROE is a measure of a company's profitability. Based on how much of its profits a company chooses to reinvest or “retain”, we are able to evaluate a company's future profit-generating ability. Generally, all else being equal, companies with higher return on equity and profit retention ratios have higher growth rates than companies that don't have these attributes.
TravelSky Technology's revenue growth and 6.9% ROE
At first glance, Travelsky Technology's ROE is nothing to talk about. However, it may be worth a second thought when you consider that the company's ROE is in line with the industry average ROE of 8.0%. However, Travelsky Technology's five-year net income has fallen by 22%. It is important to keep in mind that the company's ROE is a bit low. Therefore, this could explain the decline in profits to some extent.
However, when we compare Travelsky Technology's growth with the industry, we find that the company's revenue has been shrinking while the industry has experienced revenue growth of 2.9% over the same period, which is quite worrying.
SEHK:696 Historical Revenue Growth August 26, 2024
Earnings growth is an important metric to consider when valuing a stock. It's important for investors to know if the market has priced in a company's expected earnings growth (or decline), which can help them determine if the stock's future is bright or bleak. Is TravelSky Technology fairly valued relative to other companies? The following three valuation metrics may help you decide:
Is TravelSky Technology reinvesting its profits efficiently?
Travelsky Technology's median dividend payout ratio over the past three years is low at 15% (it retains 85% of its profits), and when put together, the lack of growth is puzzling. This is not usually the case when a company is retaining the majority of its profits. There would seem to be other reasons to explain the lack of growth in that regard. For example, the business could be in decline.
Additionally, TravelSky Technology has been paying dividends for at least a decade, and management must have recognized that shareholders prefer dividends over earnings growth. Looking at current analyst consensus data, the company's future dividend payout ratio is expected to rise to 32% over the next three years. However, TravelSky Technology's future ROE is expected to rise to 10% despite the expected increase in the company's dividend payout ratio. We speculate that there are other factors driving the expected growth in the company's ROE.
Conclusion
Overall, we have mixed feelings about TravelSky Technology. Although the company has high profit retention, its low return on investment may be holding back revenue growth. That said, we studied the latest analyst forecasts and found that while the company has shrinking its revenue in the past, analysts expect it to grow in the future. If you want to know more about the company's future revenue growth forecasts, you can take a look at this free report on analyst forecasts for the company.
Valuation is complicated, but we're here to simplify it.
Through a detailed analysis including fair value estimates, potential risks, dividends, insider transactions, financial condition, and more, we determine whether TravelSky Technology is undervalued or overvalued.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
