With its stock down 11% over the past three months, it is easy to disregard Hoyuan Green Energy (SHSE:603185). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Hoyuan Green Energy's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Hoyuan Green Energy

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 Hoyuan Green Energy is:

12% = CN¥1.5b ÷ CN¥13b (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.12 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. 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.

Hoyuan Green Energy's Earnings Growth And 12% ROE

To start with, Hoyuan Green Energy's ROE looks acceptable. On comparing with the average industry ROE of 6.1% the company's ROE looks pretty remarkable. Probably as a result of this, Hoyuan Green Energy was able to see an impressive net income growth of 51% over the last five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Hoyuan Green Energy's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 27%.

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Hoyuan Green Energy fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hoyuan Green Energy Using Its Retained Earnings Effectively?

Hoyuan Green Energy's three-year median payout ratio is a pretty moderate 25%, meaning the company retains 75% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Hoyuan Green Energy is reinvesting its earnings efficiently.

Moreover, Hoyuan Green Energy is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.

Summary

On the whole, we feel that Hoyuan Green Energy's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.