Is Macau E&M Holding Limited’s (HKG:1408) Recent Stock Performance Influenced By Its Fundamentals In Any Way? – Simply Wall St

Macau E&M Holding (HKG:1408) has had a great run on the share market with its stock up by a significant 67% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Macau E&M Holding's ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Macau E&M Holding

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) Shareholders' Equity

So, based on the above formula, the ROE for Macau E&M Holding is:

11% = MO$26m MO$236m (Based on the trailing twelve months to December 2021).

The 'return' is the yearly profit. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.11 in profit.

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

At first glance, Macau E&M Holding seems to have a decent ROE. On comparing with the average industry ROE of 8.0% the company's ROE looks pretty remarkable. For this reason, Macau E&M Holding's five year net income decline of 2.6% raises the question as to why the high ROE didn't translate into earnings growth. Therefore, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Macau E&M Holding's earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 2.6% in the same period.

Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for 1408? You can find out in our latest intrinsic value infographic research report

Despite having a normal three-year median payout ratio of 40% (where it is retaining 60% of its profits), Macau E&M Holding has seen a decline in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

On the whole, we do feel that Macau E&M Holding has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 4 risks we have identified for Macau E&M Holding by visiting our risks dashboard for free on our platform here.

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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.

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Is Macau E&M Holding Limited's (HKG:1408) Recent Stock Performance Influenced By Its Fundamentals In Any Way? - Simply Wall St