Gree Electric Appliances of Zhuhai (SZSE:000651) has had a rough three months with its share price down 5.4%. However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Gree Electric Appliances of Zhuhai's ROE today.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How To Calculate Return On Equity?

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 Gree Electric Appliances of Zhuhai is:

23% = CN¥28b ÷ CN¥125b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.23.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

Gree Electric Appliances of Zhuhai's Earnings Growth And 23% ROE

To start with, Gree Electric Appliances of Zhuhai's ROE looks acceptable. On comparing with the average industry ROE of 9.8% the company's ROE looks pretty remarkable. Yet, Gree Electric Appliances of Zhuhai has posted measly growth of 3.3% over the past five years. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Gree Electric Appliances of Zhuhai's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 5.7% in the same period.

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). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Gree Electric Appliances of Zhuhai is trading on a high P/E or a low P/E, relative to its industry.

Is Gree Electric Appliances of Zhuhai Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 46% (implying that the company retains the remaining 54% of its income), Gree Electric Appliances of Zhuhai's earnings growth was quite low. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Gree Electric Appliances of Zhuhai has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 48% of its profits over the next three years. As a result, Gree Electric Appliances of Zhuhai's ROE is not expected to change by much either, which we inferred from the analyst estimate of 20% for future ROE.

Summary

In total, it does look like Gree Electric Appliances of Zhuhai has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.