Arcplus Group (SHSE:600629) has had a rough month with its share price down 8.7%. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Arcplus Group's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How To Calculate Return On Equity?

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 Arcplus Group is:

8.3% = CN¥452m ÷ CN¥5.4b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.08 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Arcplus Group's Earnings Growth And 8.3% ROE

At first glance, Arcplus Group's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 6.2% doesn't go unnoticed by us. Consequently, this likely laid the ground for the decent growth of 11% seen over the past five years by Arcplus Group. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Arcplus Group compares quite favourably to the industry average, which shows a decline of 0.07% 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. This then helps them determine if the stock is placed for a bright or bleak future. What is 600629 worth today? The intrinsic value infographic in our free research report helps visualize whether 600629 is currently mispriced by the market.

Is Arcplus Group Using Its Retained Earnings Effectively?

In Arcplus Group's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 16% (or a retention ratio of 84%), which suggests that the company is investing most of its profits to grow its business.

Besides, Arcplus Group has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Arcplus Group's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

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