Hangzhou Guotai Environmental Protection TechnologyLtd's (SZSE:301203) stock is up by a considerable 19% over the past week. 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 Guotai Environmental Protection 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Is ROE Calculated?

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 Hangzhou Guotai Environmental Protection TechnologyLtd is:

9.4% = CN¥132m ÷ CN¥1.4b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.09 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Hangzhou Guotai Environmental Protection TechnologyLtd's Earnings Growth And 9.4% ROE

When you first look at it, Hangzhou Guotai Environmental Protection TechnologyLtd's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 5.9%, is definitely interesting. Having said that, Hangzhou Guotai Environmental Protection TechnologyLtd's net income growth over the past five years is more or less flat. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to stay flat.

As a next step, we compared Hangzhou Guotai Environmental Protection TechnologyLtd's net income growth with the industry and discovered that the industry saw an average growth of 3.8% in the same period.

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). Doing so will help them establish if the stock's future looks promising or ominous. Is Hangzhou Guotai Environmental Protection TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hangzhou Guotai Environmental Protection TechnologyLtd Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 58% (meaning, the company retains only 42% of profits) for Hangzhou Guotai Environmental Protection TechnologyLtd suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Hangzhou Guotai Environmental Protection TechnologyLtd started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.

Summary

In total, we're a bit ambivalent about Hangzhou Guotai Environmental Protection TechnologyLtd's performance. Primarily, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE. Bear in mind, the company reinvests a small portion of its profits, which explains the lack of growth. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Hangzhou Guotai Environmental Protection TechnologyLtd'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.