TravelSky Technology Limited's (HKG:696) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
It is hard to get excited after looking at TravelSky Technology's (HKG:696) recent performance, when its stock has declined 4.6% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to TravelSky Technology's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Do You 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 TravelSky Technology is:
9.3% = CN¥2.2b ÷ CN¥24b (Based on the trailing twelve months to June 2025).
The 'return' is the profit over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.09 in profit.
Check out our latest analysis for TravelSky Technology
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.
TravelSky Technology's Earnings Growth And 9.3% ROE
On the face of it, TravelSky Technology's ROE is not much to talk about. However, its ROE is similar to the industry average of 7.9%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that TravelSky Technology's net income grew significantly at a rate of 29% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared TravelSky Technology's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 42% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 TravelSky Technology is trading on a high P/E or a low P/E, relative to its industry.
Is TravelSky Technology Efficiently Re-investing Its Profits?
The three-year median payout ratio for TravelSky Technology is 26%, which is moderately low. The company is retaining the remaining 74%. By the looks of it, the dividend is well covered and TravelSky Technology is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Additionally, TravelSky Technology has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 37% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.
Conclusion
On the whole, we do feel that TravelSky Technology has some positive attributes. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.