Most readers would already know that Gree Electric Appliances of Zhuhai's (SZSE:000651) stock increased by 5.8% over the past three months. Since the market usually pay for a company's long-term financial health, we decided to study the company's fundamentals to see if they could be influencing the market. In this article, we decided to focus on Gree Electric Appliances of Zhuhai's ROE.
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 Do You Calculate Return On Equity?
ROE 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 Gree Electric Appliances of Zhuhai is:
23% = CN¥29b ÷ CN¥130b (Based on the trailing twelve months to September 2024).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.23 in profit.
What Has ROE Got To Do With 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 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.
Gree Electric Appliances of Zhuhai's Earnings Growth And 23% ROE
At first glance, Gree Electric Appliances of Zhuhai seems to have a decent ROE. Especially when compared to the industry average of 9.3% the company's ROE looks pretty impressive. This probably laid the ground for Gree Electric Appliances of Zhuhai's moderate 6.8% net income growth seen over the past five years.
We then performed a comparison between Gree Electric Appliances of Zhuhai's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 8.1% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Gree Electric Appliances of Zhuhai's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Gree Electric Appliances of Zhuhai Using Its Retained Earnings Effectively?
Gree Electric Appliances of Zhuhai has a healthy combination of a moderate three-year median payout ratio of 44% (or a retention ratio of 56%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Moreover, Gree Electric Appliances of Zhuhai is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 37%. Still, forecasts suggest that Gree Electric Appliances of Zhuhai's future ROE will drop to 16% even though the the company's payout ratio is not expected to change by much.
Conclusion
Overall, we are quite pleased with Gree Electric Appliances of Zhuhai's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.
