December 2, 2021

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Should Weakness in Bar Pacific Group Holdings Limited’s (HKG:8432) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Bar Pacific Group Holdings (HKG:8432) has had a rough three months with its share price down 10.0%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Bar Pacific Group Holdings’ ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Bar Pacific Group 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 Bar Pacific Group Holdings is:

17% = HK$13m ÷ HK$78m (Based on the trailing twelve months to December 2019).

The ‘return’ refers to a company’s earnings over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.17 in profit.

Why Is ROE Important For Earnings Growth?

So far, we’ve learnt that ROE is a measure of a company’s profitability. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

A Side By Side comparison of Bar Pacific Group Holdings’ Earnings Growth And 17% ROE

To start with, Bar Pacific Group Holdings’ ROE looks acceptable. On comparing with the average industry ROE of 6.6% the company’s ROE looks pretty remarkable. This probably laid the ground for Bar Pacific Group Holdings’ significant 22% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Bar Pacific Group Holdings’ growth is quite high when compared to the industry average growth of 4.4% in the same period, which is great to see.

SEHK:8432 Past Earnings Growth May 15th 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Bar Pacific Group Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is Bar Pacific Group Holdings Efficiently Re-investing Its Profits?

Bar Pacific Group Holdings’ very high three-year median payout ratio of 102% suggests that the company is paying more to its shareholders than what it is earning. Despite this, the company’s earnings grew significantly as we saw above. Having said that, the high payout ratio is definitely risky and something to keep an eye on. Our risks dashboard should have the 2 risks we have identified for Bar Pacific Group Holdings.

Along with seeing a growth in earnings, Bar Pacific Group Holdings only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

On the whole, we do feel that Bar Pacific Group Holdings has some positive attributes. Especially the growth in earnings which was backed by an impressive ROE. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. So far, we’ve only made a quick discussion around the company’s earnings growth. So it may be worth checking this free detailed graph of Bar Pacific Group Holdings’ past earnings, as well as revenue and cash flows to get a deeper insight into the company’s performance.

If you spot an error that warrants correction, please contact the editor at [email protected] This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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