Rimbaco Group Global Limited’s (HKG:1953) Stock’s Been Going Strong: Could Weak Financials Mean The


Rimbaco Group Global (HKG:1953) has had a great run on the share market with its stock up by a significant 113% over the last three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimatley dictates market outcomes. Specifically, we decided to study Rimbaco Group Global’s ROE in this article.

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

View our latest analysis for Rimbaco Group Global

How To 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 Rimbaco Group Global is:

2.0% = RM3.5m ÷ RM173m (Based on the trailing twelve months to April 2022).

The ‘return’ is the income the business earned 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$0.02 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Rimbaco Group Global’s Earnings Growth And 2.0% ROE

It is hard to argue that Rimbaco Group Global’s ROE is much good in and of itself. Even when compared to the industry average of 6.8%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 34% seen by Rimbaco Group Global over the last five years is not surprising. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 1.6% in the same period, we still found Rimbaco Group Global’s performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

past-earnings-growth
SEHK:1953 Past Earnings Growth September 24th 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Rimbaco Group Global is trading on a high P/E or a low P/E, relative to its industry.

Is Rimbaco Group Global Using Its Retained Earnings Effectively?

Rimbaco Group Global’s very high three-year median payout ratio of 210% over the last three years suggests that the company is paying its shareholders more than what it is earning and this explains the company’s shrinking earnings. Its usually very hard to sustain dividend payments that are higher than reported profits. Our risks dashboard should have the 5 risks we have identified for Rimbaco Group Global.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Rimbaco Group Global. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. Up till now, we’ve only made a short study of the company’s growth data. So it may be worth checking this free detailed graph of Rimbaco Group Global’s past earnings, as well as revenue and cash flows to get a deeper insight into the company’s performance.

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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2022-09-23 19:13:27

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