With its stock down 12% over the past month, it is easy to disregard Kanzhun (NASDAQ:BZ).   However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising.     Specifically, we decided to study Kanzhun's  ROE in this article.  

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.

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 Kanzhun is:

9.3% = CN¥1.3b ÷ CN¥14b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit.  So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.09.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings.  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.

Kanzhun's Earnings Growth And 9.3% ROE  

On the face of it, Kanzhun's ROE is not much to talk about.   However, the fact that the its ROE is quite higher to the industry average of 7.4% doesn't go unnoticed by us.   Particularly, the substantial 75% net income growth seen by Kanzhun over the past five years is impressive .  That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average.  Hence, there might be some other aspects that are causing earnings to grow.  Such as- high earnings retention or the company belonging to a high growth industry.    

Next, on comparing with the industry net income growth, we found that Kanzhun's growth is quite high when compared to the industry average growth of 6.0% in the same period, which is great to see.  

NasdaqGS:BZ Past Earnings Growth July 2nd 2024

Earnings growth is a huge factor in stock valuation.  It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline).   This then helps them determine if the stock is placed for a bright or bleak future.    Is BZ fairly valued? This infographic on the company's intrinsic value  has everything you need to know.  

Is Kanzhun Using Its Retained Earnings Effectively?  

Kanzhun doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.  

Conclusion  

In total, we are pretty happy with Kanzhun's performance.      Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion.       Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates.     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.