Hangzhou DPtech TechnologiesLtd (SZSE:300768) has had a great run on the share market with its stock up by a significant 13% over the last three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Hangzhou DPtech TechnologiesLtd's ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Hangzhou DPtech TechnologiesLtd is:

4.1% = CN¥131m ÷ CN¥3.2b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.04 in profit.

What Has ROE Got To Do With 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.

A Side By Side comparison of Hangzhou DPtech TechnologiesLtd's Earnings Growth And 4.1% ROE

It is hard to argue that Hangzhou DPtech TechnologiesLtd's ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 4.1%. Therefore, it might not be wrong to say that the five year net income decline of 10% seen by Hangzhou DPtech TechnologiesLtd was possibly a result of the disappointing ROE.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 3.6% in the same 5-year period, we still found Hangzhou DPtech TechnologiesLtd's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

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). This then helps them determine if the stock is placed for a bright or bleak future. 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 Hangzhou DPtech TechnologiesLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Hangzhou DPtech TechnologiesLtd Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 34% (where it is retaining 66% of its profits), Hangzhou DPtech TechnologiesLtd has seen a decline in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Hangzhou DPtech TechnologiesLtd has been paying dividends over a period of four years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Summary

On the whole, we feel that the performance shown by Hangzhou DPtech TechnologiesLtd can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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