Zhejiang HangKe Technology's (SHSE:688006) stock is up by a considerable 23% over the past three months. Since the market usually pay for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Zhejiang HangKe Technology's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Do You 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 Zhejiang HangKe Technology is:

8.9% = CN¥471m ÷ CN¥5.3b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.09 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Zhejiang HangKe Technology's Earnings Growth And 8.9% ROE

When you first look at it, Zhejiang HangKe Technology's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 6.5%, is definitely interesting. Even more so after seeing Zhejiang HangKe Technology's exceptional 21% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So, there might well be other reasons for the earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

We then compared Zhejiang HangKe Technology's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 10% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 688006 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Zhejiang HangKe Technology Making Efficient Use Of Its Profits?

The three-year median payout ratio for Zhejiang HangKe Technology is 31%, which is moderately low. The company is retaining the remaining 69%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Zhejiang HangKe Technology is reinvesting its earnings efficiently.

Moreover, Zhejiang HangKe Technology is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 25% of its profits over the next three years. However, Zhejiang HangKe Technology's ROE is predicted to rise to 15% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we are pretty happy with Zhejiang HangKe Technology's performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.