With its stock down 20% over the past three months, it is easy to disregard Hangzhou Huawang New Material TechnologyLtd (SHSE:605377). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Hangzhou Huawang New Material 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Is ROE Calculated?

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 Hangzhou Huawang New Material TechnologyLtd is:

15% = CN¥605m ÷ CN¥4.2b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made 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. 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 Huawang New Material TechnologyLtd's Earnings Growth And 15% ROE

To begin with, Hangzhou Huawang New Material TechnologyLtd seems to have a respectable ROE. Especially when compared to the industry average of 5.7% the company's ROE looks pretty impressive. Probably as a result of this, Hangzhou Huawang New Material TechnologyLtd was able to see an impressive net income growth of 25% over the last five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Hangzhou Huawang New Material TechnologyLtd's growth is quite high when compared to the industry average growth of 1.0% in the same period, which is great to see.

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. Doing so will help them establish if the stock's future looks promising or ominous. What is 605377 worth today? The intrinsic value infographic in our free research report helps visualize whether 605377 is currently mispriced by the market.

Is Hangzhou Huawang New Material TechnologyLtd Efficiently Re-investing Its Profits?

Hangzhou Huawang New Material TechnologyLtd has a three-year median payout ratio of 34% (where it is retaining 66% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Hangzhou Huawang New Material TechnologyLtd is reinvesting its earnings efficiently.

Additionally, Hangzhou Huawang New Material TechnologyLtd has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 70% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Conclusion

Overall, we are quite pleased with Hangzhou Huawang New Material TechnologyLtd'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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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