With its stock down 12% over the past month, it is easy to disregard HangZhou Everfine Photo-e-info (SZSE:300306). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to HangZhou Everfine Photo-e-info's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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 HangZhou Everfine Photo-e-info is:

6.4% = CN¥97m ÷ CN¥1.5b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.06 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

HangZhou Everfine Photo-e-info's Earnings Growth And 6.4% ROE

On the face of it, HangZhou Everfine Photo-e-info's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.3%. Particularly, the exceptional 22% net income growth seen by HangZhou Everfine Photo-e-info over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared HangZhou Everfine Photo-e-info'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 3.9%.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about HangZhou Everfine Photo-e-info's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is HangZhou Everfine Photo-e-info Making Efficient Use Of Its Profits?

HangZhou Everfine Photo-e-info has a significant three-year median payout ratio of 86%, meaning the company only retains 14% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Besides, HangZhou Everfine Photo-e-info has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we do feel that HangZhou Everfine Photo-e-info has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. Up till now, we've only made a short study of the company's growth data. You can do your own research on HangZhou Everfine Photo-e-info and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.