Is Aeso Holding Limited’s (HKG:8341) latest stock market performance a reflection of its financial health?

Aeso Holding (HKG:8341) stock is up 14% over the past week. Since the market usually pays for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could influence the market. In particular, we will pay attention to Aeso Holding’s ROE today.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Check out our latest analysis for Aeso Holding

How is ROE calculated?

the return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Aeso Holding is:

9.8% = HK$1.8 million ÷ HK$18 million (based on trailing 12 months to December 2021).

“Yield” refers to a company’s earnings over the past year. This means that for every HK$1 of equity, the company generated HK$0.10 of profit.

What is the relationship between ROE and earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Aeso Holding’s earnings growth and ROE of 9.8%

At first glance, Aeso Holding seems to have a decent ROE. Even when compared to the industry average of 9.3%, the company’s ROE looks pretty decent. Consequently, this likely laid the foundation for the impressive 22% net income growth seen over the past five years by Aeso Holding. However, there could also be other drivers behind this growth. Such as – high revenue retention or effective management in place.

We then compared Aeso Holding’s net income growth with the industry and we are happy to see that the growth figure for the company is higher compared to the industry which has a growth rate of 15% during the same period.

Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. Is Aeso Holding correctly valued compared to other companies? These 3 assessment metrics might help you decide.

Does Aeso Holding use its profits efficiently?

Aeso Holding currently pays no dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the high earnings growth number we discussed above.

Summary

Overall, we believe Aeso Holding’s performance has been quite good. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. If the company continues to increase its earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Let’s not forget that business risk is also one of the factors that influence the stock price. This is therefore also an important area for investors to pay attention to before making a decision on a company. You can see the 2 risks we have identified for Aeso Holding by visiting our risk dashboard for free on our platform here.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.