Most readers would already be aware that Hicon Network Technology (Shandong)Ltd's (SZSE:301262) stock increased significantly by 21% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Hicon Network Technology (Shandong)Ltd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Hicon Network Technology (Shandong)Ltd

How Do You 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 Hicon Network Technology (Shandong)Ltd is:

11% = CN¥394m ÷ CN¥3.7b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.11.

What Has ROE Got To Do With 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. 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.

Hicon Network Technology (Shandong)Ltd's Earnings Growth And 11% ROE

On the face of it, Hicon Network Technology (Shandong)Ltd's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 7.0%, is definitely interesting. This certainly adds some context to Hicon Network Technology (Shandong)Ltd's moderate 6.9% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

As a next step, we compared Hicon Network Technology (Shandong)Ltd's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 6.9% in the same period.

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 Hicon Network Technology (Shandong)Ltd is trading on a high P/E or a low P/E, relative to its industry.

Is Hicon Network Technology (Shandong)Ltd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 79% (or a retention ratio of 21%) for Hicon Network Technology (Shandong)Ltd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Summary

In total, it does look like Hicon Network Technology (Shandong)Ltd has some positive aspects to its business. Especially the substantial growth in earnings backed by a decent ROE. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Hicon Network Technology (Shandong)Ltd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.