EIT Environmental Development GroupLtd's (SZSE:300815) stock is up by a considerable 7.4% over the past week. Since the market usually pay for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to EIT Environmental Development GroupLtd'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for EIT Environmental Development GroupLtd

How Do You Calculate Return On Equity?

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 EIT Environmental Development GroupLtd is:

16% = CN¥608m ÷ CN¥3.8b (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.16.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

EIT Environmental Development GroupLtd's Earnings Growth And 16% ROE

To begin with, EIT Environmental Development GroupLtd seems to have a respectable ROE. On comparing with the average industry ROE of 5.9% the company's ROE looks pretty remarkable. Probably as a result of this, EIT Environmental Development GroupLtd was able to see a decent growth of 14% over the last five years.

We then compared EIT Environmental Development GroupLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.0% in the same 5-year period.

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. Doing so will help them establish if the stock's future looks promising or ominous. 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 EIT Environmental Development GroupLtd is trading on a high P/E or a low P/E, relative to its industry.

Is EIT Environmental Development GroupLtd Using Its Retained Earnings Effectively?

EIT Environmental Development GroupLtd's three-year median payout ratio to shareholders is 24% (implying that it retains 76% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, EIT Environmental Development GroupLtd has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that EIT Environmental Development GroupLtd'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.