Hubei Three Gorges Tourism Group (SZSE:002627) has had a great run on the share market with its stock up by a significant 18% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Hubei Three Gorges Tourism Group'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How To 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 Hubei Three Gorges Tourism Group is:

3.5% = CN¥115m ÷ CN¥3.3b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.03 in profit.

What Has ROE Got To Do With 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. 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.

Hubei Three Gorges Tourism Group's Earnings Growth And 3.5% ROE

It is quite clear that Hubei Three Gorges Tourism Group's ROE is rather low. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 4.3%. Hubei Three Gorges Tourism Group's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Hubei Three Gorges Tourism Group'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 0.09%.

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. If you're wondering about Hubei Three Gorges Tourism Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hubei Three Gorges Tourism Group Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 61% (meaning, the company retains only 39% of profits) for Hubei Three Gorges Tourism Group suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Hubei Three Gorges Tourism Group has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

In total, it does look like Hubei Three Gorges Tourism Group has some positive aspects to its business. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Hubei Three Gorges Tourism Group's past profit growth, check out this visualization 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.