FAR International Holdings Group Company Limited's (HKG:2516) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?
FAR International Holdings Group (HKG:2516) has had a great run on the share market with its stock up by a significant 46% over the last three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on FAR International Holdings Group's ROE.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for FAR International Holdings Group is:
2.4% = CN¥17m ÷ CN¥694m (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$0.02 in profit.
View our latest analysis for FAR International Holdings Group
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
FAR International Holdings Group's Earnings Growth And 2.4% ROE
It is quite clear that FAR International Holdings Group's ROE is rather low. Even compared to the average industry ROE of 6.7%, the company's ROE is quite dismal. Accordingly, FAR International Holdings Group's low net income growth of 3.2% over the past five years can possibly be explained by the low ROE amongst other factors.
We then compared FAR International Holdings Group's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 22% in the same 5-year period, which is a bit concerning.
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. Doing so will help them establish if the stock's future looks promising or ominous. Is FAR International Holdings Group fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is FAR International Holdings Group Using Its Retained Earnings Effectively?
FAR International Holdings Group doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. However, this doesn't explain the low earnings growth the company has seen. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
Conclusion
On the whole, we feel that the performance shown by FAR International Holdings Group can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 4 risks we have identified for FAR International Holdings Group by visiting our risks dashboard for free on our platform here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.