Qtone Education Group (Guangdong)Ltd (SZSE:300359) has had a great run on the share market with its stock up by a significant 17% over the last week. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Qtone Education Group (Guangdong)Ltd'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.

See our latest analysis for Qtone Education Group (Guangdong)Ltd

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 Qtone Education Group (Guangdong)Ltd is:

3.0% = CN¥23m ÷ CN¥767m (Based on the trailing twelve months to June 2022).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.03.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Qtone Education Group (Guangdong)Ltd's Earnings Growth And 3.0% ROE

It is quite clear that Qtone Education Group (Guangdong)Ltd's ROE is rather low. Not just that, even compared to the industry average of 6.6%, the company's ROE is entirely unremarkable. Hence, the flat earnings seen by Qtone Education Group (Guangdong)Ltd over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Qtone Education Group (Guangdong)Ltd'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 11% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Qtone Education Group (Guangdong)Ltd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Qtone Education Group (Guangdong)Ltd Efficiently Re-investing Its Profits?

Qtone Education Group (Guangdong)Ltd doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business. However, this doesn't explain why the company hasn't seen any growth. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Summary

Overall, we have mixed feelings about Qtone Education Group (Guangdong)Ltd. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Qtone Education Group (Guangdong)Ltd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.