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Does The Market Have A Low Tolerance For Geely Automobile Holdings Limited’s (HKG:175) Mixed Fundamentals?

Does The Market Have A Low Tolerance For Geely Automobile Holdings Limited’s (HKG:175) Mixed Fundamentals?

Geely Automobile Holdings (HKG:175) has had a rough month with its share price down 18{7b5a5d0e414f5ae9befbbfe0565391237b22ed5a572478ce6579290fab1e7f91}. It is possible that the markets have ignored the company’s differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company’s financial performance. Specifically, we decided to study Geely Automobile Holdings’ ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

Check out our latest analysis for Geely Automobile Holdings

How Do You Calculate Return On Equity?

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:

4.4{7b5a5d0e414f5ae9befbbfe0565391237b22ed5a572478ce6579290fab1e7f91} = CN¥3.2b ÷ CN¥73b (Based on the trailing twelve months to June 2022).

The ‘return’ is the income the business earned over the last year. So, this means that for every HK$1 of its shareholder’s investments, the company generates a profit of HK$0.04.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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. 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.

Geely Automobile Holdings’ Earnings Growth And 4.4{7b5a5d0e414f5ae9befbbfe0565391237b22ed5a572478ce6579290fab1e7f91} ROE

On the face of it, Geely Automobile Holdings’ ROE is not much to talk about. We then compared the company’s ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 9.5{7b5a5d0e414f5ae9befbbfe0565391237b22ed5a572478ce6579290fab1e7f91}. Therefore, it might not be wrong to say that the five year net income decline of 20{7b5a5d0e414f5ae9befbbfe0565391237b22ed5a572478ce6579290fab1e7f91} seen by Geely Automobile Holdings was probably the result of it having a lower ROE. We reckon that there could also be other factors at play here. For example, it is possible that the business has allocated capital poorly or that the company has a very high payout ratio.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 0.8{7b5a5d0e414f5ae9befbbfe0565391237b22ed5a572478ce6579290fab1e7f91} in the same period, we found that Geely Automobile Holdings’ performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

past-earnings-growth
SEHK:175 Past Earnings Growth February 28th 2023

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. Has the market priced in the future outlook for 175? You can find out in our latest intrinsic value infographic research report.

Is Geely Automobile Holdings Efficiently Re-investing Its Profits?

Looking at its three-year median payout ratio of 31{7b5a5d0e414f5ae9befbbfe0565391237b22ed5a572478ce6579290fab1e7f91} (or a retention ratio of 69{7b5a5d0e414f5ae9befbbfe0565391237b22ed5a572478ce6579290fab1e7f91}) which is pretty normal, Geely Automobile Holdings’ declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

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 28{7b5a5d0e414f5ae9befbbfe0565391237b22ed5a572478ce6579290fab1e7f91}. Regardless, the future ROE for Geely Automobile Holdings is predicted to rise to 10{7b5a5d0e414f5ae9befbbfe0565391237b22ed5a572478ce6579290fab1e7f91} despite there being not much change expected in its payout ratio.

Conclusion

In total, we’re a bit ambivalent about Geely Automobile Holdings’ performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.

Valuation is complex, but we’re helping make it simple.

Find out whether Geely Automobile Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.