It is hard to get excited after looking at Tianjin Yiyi Hygiene ProductsLtd's (SZSE:001206) recent performance, when its stock has declined 23% over the past month. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Tianjin Yiyi Hygiene ProductsLtd's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Tianjin Yiyi Hygiene ProductsLtd is:

6.1% = CN¥111m ÷ CN¥1.8b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

A Side By Side comparison of Tianjin Yiyi Hygiene ProductsLtd's Earnings Growth And 6.1% ROE

When you first look at it, Tianjin Yiyi Hygiene ProductsLtd's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 5.3%, we may spare it some thought. Even so, Tianjin Yiyi Hygiene ProductsLtd has shown a fairly decent growth in its net income which grew at a rate of 12%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Tianjin Yiyi Hygiene ProductsLtd compares quite favourably to the industry average, which shows a decline of 1.3% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Tianjin Yiyi Hygiene ProductsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Tianjin Yiyi Hygiene ProductsLtd Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 49% (implying that the company retains 51% of its profits), it seems that Tianjin Yiyi Hygiene ProductsLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

While Tianjin Yiyi Hygiene ProductsLtd has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 31% over the next three years. The fact that the company's ROE is expected to rise to 9.8% over the same period is explained by the drop in the payout ratio.

Summary

In total, it does look like Tianjin Yiyi Hygiene ProductsLtd has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.