With its stock down 19% over the past three months, it is easy to disregard Guangzhou Haoyang ElectronicLtd (SZSE:300833). 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 Guangzhou Haoyang ElectronicLtd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Do You 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 Guangzhou Haoyang ElectronicLtd is:

15% = CN¥371m ÷ CN¥2.5b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.15 in profit.

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. 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.

Guangzhou Haoyang ElectronicLtd's Earnings Growth And 15% ROE

At first glance, Guangzhou Haoyang ElectronicLtd seems to have a decent ROE. Especially when compared to the industry average of 6.9% the company's ROE looks pretty impressive. Probably as a result of this, Guangzhou Haoyang ElectronicLtd was able to see an impressive net income growth of 27% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Guangzhou Haoyang ElectronicLtd'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 12%.

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. 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 Guangzhou Haoyang ElectronicLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Guangzhou Haoyang ElectronicLtd Efficiently Re-investing Its Profits?

The three-year median payout ratio for Guangzhou Haoyang ElectronicLtd is 50%, which is moderately low. The company is retaining the remaining 50%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Guangzhou Haoyang ElectronicLtd is reinvesting its earnings efficiently.

Additionally, Guangzhou Haoyang ElectronicLtd has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, we are pretty happy with Guangzhou Haoyang ElectronicLtd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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.

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