It is hard to get excited after looking at Hangzhou Huawang New Material TechnologyLtd's (SHSE:605377) recent performance, when its stock has declined 15% over the past month. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Hangzhou Huawang New Material TechnologyLtd'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 Hangzhou Huawang New Material TechnologyLtd is:
15% = CN¥577m ÷ CN¥3.9b (Based on the trailing twelve months to September 2024).
The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.15 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. 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 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 5.9% the company's ROE looks pretty impressive. This probably laid the ground for Hangzhou Huawang New Material TechnologyLtd's significant 22% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Hangzhou Huawang New Material TechnologyLtd'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 1.7%.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 605377? You can find out in our latest intrinsic value infographic research report.
Is Hangzhou Huawang New Material TechnologyLtd Using Its Retained Earnings Effectively?
The three-year median payout ratio for Hangzhou Huawang New Material TechnologyLtd is 36%, which is moderately low. The company is retaining the remaining 64%. 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.
Besides, Hangzhou Huawang New Material TechnologyLtd has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its 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. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.
Summary
Overall, we are quite pleased with Hangzhou Huawang New Material TechnologyLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
