Hangzhou Hikvision Digital Technology Co., Ltd. (SZSE:002415) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

Hangzhou Hikvision Digital Technology (SZSE:002415) has had a rough week with its share price down 1.1%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Hangzhou Hikvision Digital Technology's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Do You 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 Hangzhou Hikvision Digital Technology is:

18% = CN¥15b ÷ CN¥83b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.18.

View our latest analysis for Hangzhou Hikvision Digital Technology

Why Is ROE Important For 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.

Hangzhou Hikvision Digital Technology's Earnings Growth And 18% ROE

At first glance, Hangzhou Hikvision Digital Technology seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.0%. Despite this, Hangzhou Hikvision Digital Technology's five year net income growth was quite flat over the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.

We then compared Hangzhou Hikvision Digital Technology's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 3.9% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Hangzhou Hikvision Digital Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hangzhou Hikvision Digital Technology Making Efficient Use Of Its Profits?

Hangzhou Hikvision Digital Technology has a high three-year median payout ratio of 53% (or a retention ratio of 47%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Additionally, Hangzhou Hikvision Digital Technology has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 68% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

Overall, we feel that Hangzhou Hikvision Digital Technology certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.