Xiaomi Corporation (HKG:1810) Stocks are down but fundamentals look decent: will the market correct the stock price going forward?

Xiaomi (HKG:1810) had a tough three months with its share price down 33%. However, the company’s fundamentals look pretty decent and long-term financials are generally in line with future market price movements. In this article, we decided to focus on Xiaomi’s ROE.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

See our latest analysis for Xiaomi

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Xiaomi is:

2.9% = CN¥4.1b ÷ CN¥141b (based on trailing 12 months to June 2022).

“Yield” is the income the business has earned over the past year. So this means that for every HK$1 of investment by its shareholder, the company generates a profit of HK$0.03.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Xiaomi’s earnings growth and 2.9% ROE

As you can see, Xiaomi’s ROE seems quite low. Even compared to the industry average ROE of 7.4%, the company’s ROE is pretty dismal. Despite this, surprisingly, Xiaomi has seen an exceptional net income growth of 54% over the past five years. We believe there could be other factors at play here. Such as – high revenue retention or effective management in place.

In a next step, we compared Xiaomi’s net income growth with the industry, and fortunately, we found that the growth seen by the company is higher than the industry average growth of 11%.

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. Is Xiaomi valued enough compared to other companies? These 3 assessment metrics might help you decide.

Does Xiaomi effectively reinvest its profits?

Since Xiaomi does not pay any dividends to its shareholders, we infer that the company has reinvested all its profits to grow its business.

Summary

All in all, it seems that Xiaomi has positive aspects for its business. With a high reinvestment rate, albeit at a low ROE, the company managed to see considerable growth in earnings. Looking at current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.