Most readers would already be aware that CITIC Telecom International Holdings' (HKG:1883) stock increased significantly by 5.3% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study CITIC Telecom International Holdings' ROE in this article.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Is ROE Calculated?

Return on equity 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 CITIC Telecom International Holdings is:

13% = HK$1.4b ÷ HK$11b (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.13 in profit.

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.

CITIC Telecom International Holdings' Earnings Growth And 13% ROE

To begin with, CITIC Telecom International Holdings seems to have a respectable ROE. Especially when compared to the industry average of 6.8% the company's ROE looks pretty impressive. This certainly adds some context to CITIC Telecom International Holdings' decent 6.1% net income growth seen over the past five years.

Next, on comparing CITIC Telecom International Holdings' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 7.5% over the last few years.

Earnings growth is a huge factor in stock valuation. 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. Is CITIC Telecom International Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is CITIC Telecom International Holdings Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 75% (or a retention ratio of 25%) for CITIC Telecom International Holdings suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, CITIC Telecom International Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 73%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 13%.

Summary

In total, we are pretty happy with CITIC Telecom International Holdings' performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.