It is hard to get excited after looking at Kinetic Development Group's (HKG:1277) recent performance, when its stock has declined 14% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Kinetic Development Group's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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 Kinetic Development Group is:

33% = CN¥2.6b ÷ CN¥7.9b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.33 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. 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.

Kinetic Development Group's Earnings Growth And 33% ROE

First thing first, we like that Kinetic Development Group has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 9.9% also doesn't go unnoticed by us. As a result, Kinetic Development Group's exceptional 24% net income growth seen over the past five years, doesn't come as a surprise.

We then performed a comparison between Kinetic Development Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 26% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Kinetic Development Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kinetic Development Group Making Efficient Use Of Its Profits?

The three-year median payout ratio for Kinetic Development Group is 33%, which is moderately low. The company is retaining the remaining 67%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Kinetic Development Group is reinvesting its earnings efficiently.

Besides, Kinetic Development Group has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Kinetic Development Group'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Kinetic Development Group.

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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.