Tianjin Yiyi Hygiene ProductsLtd (SZSE:001206) has had a great run on the share market with its stock up by a significant 26% over the last three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Tianjin Yiyi Hygiene ProductsLtd'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 To Calculate Return On Equity?

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 Tianjin Yiyi Hygiene ProductsLtd is:

9.2% = CN¥167m ÷ CN¥1.8b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. 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?

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.

Tianjin Yiyi Hygiene ProductsLtd's Earnings Growth And 9.2% ROE

At first glance, Tianjin Yiyi Hygiene ProductsLtd's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 5.8% which we definitely can't overlook. However, Tianjin Yiyi Hygiene ProductsLtd has seen a flattish net income growth over the past five years, which is not saying much. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the flat earnings growth.

Next, we compared Tianjin Yiyi Hygiene ProductsLtd's performance against the industry and found that the industry shrunk its earnings at 0.9% in the same period, which suggests that the company's earnings have been shrinking at a slower rate than its industry, While this is not particularly good, its not particularly bad either.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Tianjin Yiyi Hygiene ProductsLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tianjin Yiyi Hygiene ProductsLtd Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 74% (implying that the company keeps only 26% of its income) of its business to reinvest into its business), most of Tianjin Yiyi Hygiene ProductsLtd's profits are being paid to shareholders, which explains the absence of growth in earnings.

Moreover, Tianjin Yiyi Hygiene ProductsLtd has been paying dividends for three years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

On the whole, we feel that the performance shown by Tianjin Yiyi Hygiene ProductsLtd can be open to many interpretations. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.