Has Hallenstein Glasson Holdings Limited's (NZSE:HLG) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

editorial-team@simplywallst.com (Simply Wall St)

Mon, Nov 25, 2024, 6:15 PM 4 min read

Most readers would already be aware that Hallenstein Glasson Holdings' (NZSE:HLG) stock increased significantly by 29% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Hallenstein Glasson Holdings' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Hallenstein Glasson Holdings

How Is ROE Calculated?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Hallenstein Glasson Holdings is:

33% = NZ$34m ÷ NZ$103m (Based on the trailing twelve months to August 2024).

The 'return' is the profit over the last twelve months. That means that for every NZ$1 worth of shareholders' equity, the company generated NZ$0.33 in profit.

What Has ROE Got To Do With Earnings Growth?

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

Hallenstein Glasson Holdings' Earnings Growth And 33% ROE

Firstly, we acknowledge that Hallenstein Glasson Holdings has a significantly high ROE. Secondly, even when compared to the industry average of 24% the company's ROE is quite impressive. However, for some reason, the higher returns aren't reflected in Hallenstein Glasson Holdings' meagre five year net income growth average of 3.1%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Hallenstein Glasson Holdings' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 6.0% in the same period.

past-earnings-growth — NZSE:HLG Past Earnings Growth November 26th 2024

Earnings growth is a huge factor in stock valuation. 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. Is Hallenstein Glasson Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hallenstein Glasson Holdings Using Its Retained Earnings Effectively?

Hallenstein Glasson Holdings has a three-year median payout ratio of 89% (implying that it keeps only 11% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

Moreover, Hallenstein Glasson Holdings has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 88%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 35%.

Summary

On the whole, we do feel that Hallenstein Glasson Holdings has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.