Hallenstein Glasson Holdings Limited's (NZSE:HLG) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

Hallenstein Glasson Holdings' (NZSE:HLG) stock up by 7.6% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Hallenstein Glasson Holdings' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Hallenstein Glasson Holdings

How To Calculate Return On Equity?

Return on equity 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:

32% = NZ$28m ÷ NZ$87m (Based on the trailing twelve months to August 2020).

The 'return' is the income the business earned over the last year. That means that for every NZ$1 worth of shareholders' equity, the company generated NZ$0.32 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. 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.

A Side By Side comparison of Hallenstein Glasson Holdings' Earnings Growth And 32% ROE

Firstly, we acknowledge that Hallenstein Glasson Holdings has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 14% also doesn't go unnoticed by us. Probably as a result of this, Hallenstein Glasson Holdings was able to see a decent net income growth of 16% over the last five years.

Next, on comparing with the industry net income growth, we found that Hallenstein Glasson Holdings' growth is quite high when compared to the industry average growth of 7.3% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Hallenstein Glasson Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hallenstein Glasson Holdings Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 93% (or a retention ratio of 7.1%) for Hallenstein Glasson Holdings suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Hallenstein Glasson Holdings 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.

Conclusion

Overall, we feel that Hallenstein Glasson Holdings certainly does have some positive factors to consider. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. Up till now, we've only made a short study of the company's growth data. You can do your own research on Hallenstein Glasson Holdings and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

This article by Simply Wall St is general in nature. 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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