It is hard to get excited after looking at DeHua TB New Decoration MaterialLtd's (SZSE:002043) recent performance, when its stock has declined 16% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study DeHua TB New Decoration MaterialLtd's 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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 DeHua TB New Decoration MaterialLtd is:

22% = CN¥725m ÷ CN¥3.3b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.22 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

DeHua TB New Decoration MaterialLtd's Earnings Growth And 22% ROE

To start with, DeHua TB New Decoration MaterialLtd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 5.7%. This certainly adds some context to DeHua TB New Decoration MaterialLtd's decent 13% net income growth seen over the past five years.

As a next step, we compared DeHua TB New Decoration MaterialLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 1.0%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about DeHua TB New Decoration MaterialLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is DeHua TB New Decoration MaterialLtd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 61% (or a retention ratio of 39%) for DeHua TB New Decoration MaterialLtd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, DeHua TB New Decoration MaterialLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with 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 65%. Accordingly, forecasts suggest that DeHua TB New Decoration MaterialLtd's future ROE will be 24% which is again, similar to the current ROE.

Summary

On the whole, we feel that DeHua TB New Decoration MaterialLtd's performance has been quite good. 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.

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