With its stock down 9.4% over the past three months, it is easy to disregard Huakai Yibai TechnologyLtd (SZSE:300592). 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 Huakai Yibai TechnologyLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Huakai Yibai TechnologyLtd is:

12% = CN¥254m ÷ CN¥2.2b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. 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.

Huakai Yibai TechnologyLtd's Earnings Growth And 12% ROE

To start with, Huakai Yibai TechnologyLtd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 6.4%. This probably laid the ground for Huakai Yibai TechnologyLtd's significant 65% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Huakai Yibai TechnologyLtd's growth is quite high when compared to the industry average growth of 7.1% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Huakai Yibai TechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Huakai Yibai TechnologyLtd Efficiently Re-investing Its Profits?

Huakai Yibai TechnologyLtd's three-year median payout ratio is a pretty moderate 33%, meaning the company retains 67% of its income. By the looks of it, the dividend is well covered and Huakai Yibai TechnologyLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Huakai Yibai TechnologyLtd is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 34% of its profits over the next three years. Still, forecasts suggest that Huakai Yibai TechnologyLtd's future ROE will rise to 18% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we are quite pleased with Huakai Yibai TechnologyLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.