ITE (Holdings) Limited (HKG:8092) Stock's On A Decline: Are Poor Fundamentals The Cause?

With its stock down 11% over the past week, it is easy to disregard ITE (Holdings) (HKG:8092). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study ITE (Holdings)'s ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Do You 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 ITE (Holdings) is:

11% = HK$2.1m ÷ HK$19m (Based on the trailing twelve months to March 2025).

The 'return' refers to a company's earnings over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.11.

See our latest analysis for ITE (Holdings)

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

ITE (Holdings)'s Earnings Growth And 11% ROE

On the face of it, ITE (Holdings)'s ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 5.8% which we definitely can't overlook. But then again, seeing that ITE (Holdings)'s net income shrunk at a rate of 18% in the past five years, makes us think again. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. So that could be one of the factors that are causing earnings growth to shrink.

As a next step, we compared ITE (Holdings)'s performance with the industry and found thatITE (Holdings)'s performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 13% in the same period, which is a slower than the company.

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 8092 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is ITE (Holdings) Using Its Retained Earnings Effectively?

ITE (Holdings) has a high three-year median payout ratio of 98% (that is, it is retaining 1.6% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 5 risks we have identified for ITE (Holdings) by visiting our risks dashboard for free on our platform here.

In addition, ITE (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

Overall, we would be extremely cautious before making any decision on ITE (Holdings). While its ROE is pretty moderate, the company is retaining very little of its profits, meaning very little of its profits are being reinvested into the business. This explains the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. You can do your own research on ITE (Holdings) and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.