TravelSky Technology Limited (HKG:696) share prices are soaring but its financial situation looks shaky. Will the upward trend continue?

Many of our readers will already be aware that TravelSky Technology's (HKG:696) share price has risen significantly by 21% over the past three months. However, we decided to focus on the company's fundamentals, which don't seem to give a clear indication of its financial health. In particular, we will be looking at TravelSky Technology's ROE today.

Return on Equity (ROE) is a measure of how effectively a company is growing its value and managing investors' money. In other words, it is a measure of how successful a company is at converting shareholder investments into profits.

Read our latest analysis on TravelSky Technology

How is ROE calculated?

Return on equity can be calculated using the following formula:

Return on Equity = Net Income (from continuing operations) / Shareholders' Equity

So, based on the above formula, TravelSky Technology's ROE is:

6.9% = CNY 1.4 billion / CNY 21 billion (Based on the trailing twelve months to December 2023).

“Return” refers to profit after tax over the trailing twelve months. One way to conceptualize this is that for every HK$1 of shareholders' capital, the company made HK$0.07 in profit.

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. Based on how much of its profits a company chooses to reinvest or “retain”, we are then able to evaluate a company's future profit-generating ability. Assuming all else remains constant, the higher the ROE and retained profits, the higher a company's growth rate will be relative to companies that don't necessarily have these characteristics.

Travel Sky Technology's revenue growth and 6.9% ROE

At first glance, Travelsky Technology's ROE does not look all that attractive. However, given that the company's ROE is in line with the industry average ROE of 8.2%, this may be a bit of a stretch. However, Travelsky Technology's five-year net income has been declining at a rate of 22%. Keep in mind that the company's ROE is somewhat low, so the decline in revenue could also be a result of this.

As a next step, we compare TravelSky Technology's performance with the industry and find that compared to the industry, TravelSky Technology's performance is also weaker, with the company's revenue decline of 11% over the same period being lower than the industry's.

The criterion for valuing a company is heavily tied to its earnings growth. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already priced into the stock price. Doing so will tell them whether the stock is headed for a bright future or a quagmire awaits. What is 696 worth today? The intrinsic value infographic in our free research report helps visualize whether 696 is currently undervalued by the market.

Is TravelSky Technology using its profits efficiently?

Travelsky Technology's median dividend payout ratio over the past three years is low at 15% (it retains 85% of its profits), and when put together, the lack of growth is puzzling. This is not usually the case when a company is retaining the majority of its profits. There would seem to be other reasons to explain the lack of growth in that regard. For example, the business could be in decline.

Additionally, TravelSky Technology has been paying dividends for at least 10 years. This means the company's management is determined to pay dividends even with little to no earnings growth. Our most recent analyst data suggests that the company's future dividend payout ratio is expected to rise to 33% over the next three years. Nevertheless, TravelSky Technology's future ROE is projected to rise to 11%, even with the dividend payout ratio expected to rise. We speculate that there may be other business characteristics that could be driving the expected growth in the company's ROE.

Conclusion

Overall, we are somewhat ambivalent about TravelSky Technology's performance. It appears the company has retained most of its profits, but the low ROE suggests that investors may not be benefiting from reinvestment after all. Low revenue growth suggests our theory is correct. That said, looking at current analyst forecasts, the company's revenue growth rate is expected to improve significantly. Are these analyst forecasts based on wider industry expectations, or on the company's fundamentals? Click here to go to the company's analyst forecasts page.

Have feedback about this article? Concerns about the content? contact Please contact us directly. Or email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We use only unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives, or your financial situation. We seek to provide long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.