IAG Holdings Limited (HKG: 8513) share soars but financial data looks inconsistent: will the uptrend continue?
IAG Holdings (HKG: 8513) shares have risen significantly by 22% in the past week. However, we wonder if the inconsistent financial data of the company would negatively impact the current momentum in stock prices. In particular, we will be paying close attention to the ROE of IAG Holdings today.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for IAG Holdings
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for IAG Holdings is:
1.2% = S $ 209,000 ÷ S $ 18 million (based on the last twelve months up to September 2021).
The “return” is the income the business has earned over the past year. Another way to look at it is that for every HK $ 1 worth of equity, the company was able to make HK $ 0.01 in profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of the growth potential of the company. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Growth in earnings of IAG Holdings and 1.2% ROE
It is difficult to say that the ROE of IAG Holdings is very good on its own. Even compared to the industry average ROE of 12%, the company’s ROE is pretty dismal. So the low 3.5% net income growth seen by IAG Holdings over the past five years could likely be the result of lower ROE.
Then, comparing with the industry’s net income growth, we found that the reported growth of IAG Holdings was lower than the industry’s growth by 15% over the same period, which we didn’t do not like to see.
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 will help them determine whether the future of the stock looks bright or threatening. If you’re wondering how IAG Holdings is valued, check out this gauge of its price / earnings ratio, relative to its industry.
Is IAG Holdings Efficiently Reinvesting Its Profits?
IAG Holdings does not pay any dividends, which means that all of its profits are potentially reinvested in the business. However, there has been very little profit growth to show for this. Therefore, there could be other reasons for the lack in this regard. For example, the business could be in decline.
All in all, we are a little ambivalent about the performance of IAG Holdings. Although the company has a high reinvestment rate, the low ROE means that all that reinvestment is not benefiting its investors and, moreover, it has a negative impact on profit growth. In conclusion, we would proceed with caution with this company and one way to do it would be to look at the risk profile of the company. Our risk dashboard would contain the 2 risks that we have identified for IAG Holdings.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.