Tencent Holdings (HKG: 700) had a rough three-month period with its share price down 27%. But if you pay close attention to it, you might understand that its strong financial data could mean that the stock could potentially see its value rise in the long run, given how the markets typically reward companies with good health. financial. In particular, we will be paying close attention to Tencent Holdings’ ROE today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.
See our latest analysis for Tencent Holdings
How do you calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Tencent Holdings’ ROE is:
21% = CN ¥ 190b ÷ CN ¥ 927b (Based on the last twelve months up to June 2021).
The “return” is the income the business has earned over the past year. This means that for every HK $ 1 worth of equity, the company generated HK $ 0.21 in profit.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess the profits that the company is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the company. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Tencent Holdings profit growth and 21% ROE
At first glance, Tencent Holdings appears to have a decent ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 7.7%. This certainly adds context to Tencent Holdings’ exceptional 28% net profit growth seen over the past five years. We believe that there could also be other aspects that positively influence the company’s profit growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
Then, comparing Tencent Holdings’ net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 28% over the same period.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. Is 700 fair valued? This intrinsic business value infographic has everything you need to know.
Is Tencent Holdings Efficiently Reinvesting Profits?
Tencent Holdings’ three-year median payout ratio is less than 9.5%, implying that it retains a higher percentage (90%) of its earnings. So it appears that Tencent Holdings is massively reinvesting its profits to grow its business, which is reflected in its profit growth.
In addition, Tencent Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing the profits with its shareholders. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 8.3%. Therefore, the company’s future ROE is also unlikely to change much, with analysts predicting an ROE of 16%.
Overall, we are quite happy with the performance of Tencent Holdings. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. However, a study of the latest analysts’ forecasts shows that the company is likely to experience a slowdown in future earnings growth. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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