Most readers would already be aware that HONG RI DA Technology's (SZSE:301285) stock increased significantly by 12% over the past week. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on HONG RI DA Technology's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for HONG RI DA Technology

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for HONG RI DA Technology is:

3.3% = CN¥35m ÷ CN¥1.1b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.03 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. 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.

HONG RI DA Technology's Earnings Growth And 3.3% ROE

As you can see, HONG RI DA Technology's ROE looks pretty weak. Even when compared to the industry average of 6.6%, the ROE figure is pretty disappointing. Hence, the flat earnings seen by HONG RI DA Technology over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that HONG RI DA Technology's reported growth was lower than the industry growth of 11% over the last few years, which is not something we like to see.

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. If you're wondering about HONG RI DA Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is HONG RI DA Technology Using Its Retained Earnings Effectively?

HONG RI DA Technology's low three-year median payout ratio of 16%, (meaning the company retains84% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

Additionally, HONG RI DA Technology started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.

Conclusion

On the whole, we feel that the performance shown by HONG RI DA Technology can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of HONG RI DA Technology's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.