It is hard to get excited after looking at Hangzhou Cogeneration Group's (SHSE:605011) recent performance, when its stock has declined 14% over the past week. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Hangzhou Cogeneration Group'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.

How Is ROE Calculated?

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 Hangzhou Cogeneration Group is:

10% = CN¥277m ÷ CN¥2.7b (Based on the trailing twelve months to December 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¥0.10 in profit.

Why Is ROE Important For 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. 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.

Hangzhou Cogeneration Group's Earnings Growth And 10% ROE

When you first look at it, Hangzhou Cogeneration Group's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 5.7% which we definitely can't overlook. Still, Hangzhou Cogeneration Group has seen a flat net income growth over the past five years. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Therefore, the low to flat growth in earnings could also be the result of this.

As a next step, we compared Hangzhou Cogeneration Group's net income growth with the industry and discovered that the company's growth is slightly better than the industry which has shrunk at a rate of 1.9% in the same 5-year period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for 605011? You can find out in our latest intrinsic value infographic research report

Is Hangzhou Cogeneration Group Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 31% (meaning the company retains69% of profits) in the last three-year period, Hangzhou Cogeneration Group's earnings growth was more or les flat. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Hangzhou Cogeneration Group has paid dividends over a period of three years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

In total, we are pretty happy with Hangzhou Cogeneration Group's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. Up till now, we've only made a short study of the company's growth data. You can do your own research on Hangzhou Cogeneration Group and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.