Hangzhou Gisway Information TechnologyLtd's (SZSE:301390) stock is up by a considerable 61% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Hangzhou Gisway Information TechnologyLtd's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

How To Calculate Return On Equity?

ROE 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 Hangzhou Gisway Information TechnologyLtd is:

6.1% = CN¥58m ÷ CN¥952m (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.06 in profit.

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. 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.

Hangzhou Gisway Information TechnologyLtd's Earnings Growth And 6.1% ROE

At first glance, Hangzhou Gisway Information TechnologyLtd's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.9%. On the other hand, Hangzhou Gisway Information TechnologyLtd reported a fairly low 3.9% net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. Hence, this does provide some context to low earnings growth seen by the company.

As a next step, we compared Hangzhou Gisway Information TechnologyLtd'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 6.6% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Hangzhou Gisway Information TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hangzhou Gisway Information TechnologyLtd Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 41% (or a retention ratio of 59% over the past three years, Hangzhou Gisway Information TechnologyLtd has seen very little growth in earnings as we saw above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Hangzhou Gisway Information TechnologyLtd only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Summary

In total, we're a bit ambivalent about Hangzhou Gisway Information TechnologyLtd's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 2 risks we have identified for Hangzhou Gisway Information TechnologyLtd visit our risks dashboard for free.

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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.