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Are Poor Fundamentals The Cause?


With its stock down 8.6% over the past week, it is easy to disregard Karin Technology Holdings (SGX:K29). Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company’s key financial indicators. In this article, we decided to focus on Karin Technology Holdings’ ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

View our latest analysis for Karin Technology 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 Karin Technology Holdings is:

4.4% = HK$19m ÷ HK$423m (Based on the trailing twelve months to June 2022).

The ‘return’ is the amount earned after tax over the last twelve months. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.04 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Karin Technology Holdings’ Earnings Growth And 4.4% ROE

On the face of it, Karin Technology Holdings’ ROE is not much to talk about. Next, when compared to the average industry ROE of 7.0%, the company’s ROE leaves us feeling even less enthusiastic. For this reason, Karin Technology Holdings’ five year net income decline of 6.9% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. For example, it is possible that the business has allocated capital poorly or that the company has a very high payout ratio.

So, as a next step, we compared Karin Technology Holdings’ performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 8.1% in the same period.

past-earnings-growth

past-earnings-growth

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Karin Technology Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Karin Technology Holdings Making Efficient Use Of Its Profits?

Karin Technology Holdings’ very high three-year median payout ratio of 119% 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. To know the 6 risks we have identified for Karin Technology Holdings visit our risks dashboard for free.

In addition, Karin Technology Holdings has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

On the whole, Karin Technology Holdings’ performance is quite a big let-down. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. Until now, we have only just grazed the surface of the company’s past performance by looking at the company’s fundamentals. You can do your own research on Karin Technology Holdings and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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.

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