Helloworld Travel Limited’s (ASX:HLO) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 13% over the past three months, it is easy to disregard Helloworld Travel (ASX:HLO). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Helloworld Travel’s ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.

See our latest analysis for Helloworld Travel

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 Helloworld Travel is:

10% = AU$34m ÷ AU$323m (Based on the trailing twelve months to December 2023).

The ‘return’ is the yearly profit. So, this means that for every A$1 of its shareholder’s investments, the company generates a profit of A$0.10.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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.

Helloworld Travel’s Earnings Growth And 10% ROE

At first glance, Helloworld Travel seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 10%. However, while Helloworld Travel has a pretty respectable ROE, its five year net income decline rate was 4.6% . Based on this, we feel that there might be other reasons which haven’t been discussed so far in this article that could be hampering the company’s growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

So, as a next step, we compared Helloworld Travel’s 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 7.4% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. Is Helloworld Travel fairly valued compared to other companies? These 3 valuation measures might help you decide.

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Is Helloworld Travel Efficiently Re-investing Its Profits?

Helloworld Travel’s declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its LTM (or last twelve month) payout ratio of 51% (or a retention ratio of 49%). With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 2 risks we have identified for Helloworld Travel visit our risks dashboard for free.

Additionally, Helloworld Travel has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 56% of its profits over the next three years. However, Helloworld Travel’s ROE is predicted to rise to 13% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we feel that Helloworld Travel certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren’t reaping the benefits of the high rate of return. Having said that, looking at current analyst estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com