Most readers would already be aware that Humanwell Healthcare (Group)Ltd's (SHSE:600079) stock increased significantly by 49% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Humanwell Healthcare (Group)Ltd'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. 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 Humanwell Healthcare (Group)Ltd is:

13% = CN¥2.6b ÷ CN¥21b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.13 in profit.

Why Is ROE Important For Earnings Growth?

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

Humanwell Healthcare (Group)Ltd's Earnings Growth And 13% ROE

At first glance, Humanwell Healthcare (Group)Ltd seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 7.7%. This certainly adds some context to Humanwell Healthcare (Group)Ltd's exceptional 29% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Humanwell Healthcare (Group)Ltd's growth is quite high when compared to the industry average growth of 9.1% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Humanwell Healthcare (Group)Ltd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Humanwell Healthcare (Group)Ltd Efficiently Re-investing Its Profits?

Humanwell Healthcare (Group)Ltd has a really low three-year median payout ratio of 12%, meaning that it has the remaining 88% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Humanwell Healthcare (Group)Ltd has been paying dividends for at least ten years or more. 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 over the next three years is expected to be approximately 14%. Accordingly, forecasts suggest that Humanwell Healthcare (Group)Ltd's future ROE will be 12% which is again, similar to the current ROE.

Conclusion

On the whole, we feel that Humanwell Healthcare (Group)Ltd's performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.