It is hard to get excited after looking at 37 Interactive Entertainment Network Technology Group's (SZSE:002555) recent performance, when its stock has declined 19% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to 37 Interactive Entertainment Network Technology Group's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Is ROE Calculated?

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 37 Interactive Entertainment Network Technology Group is:

19% = CN¥2.4b ÷ CN¥13b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.19 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

37 Interactive Entertainment Network Technology Group's Earnings Growth And 19% ROE

At first glance, 37 Interactive Entertainment Network Technology Group seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 4.4%. However, for some reason, the higher returns aren't reflected in 37 Interactive Entertainment Network Technology Group's meagre five year net income growth average of 4.7%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing 37 Interactive Entertainment Network Technology Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 4.8% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is 37 Interactive Entertainment Network Technology Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is 37 Interactive Entertainment Network Technology Group Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 60% (that is, the company retains only 40% of its income) over the past three years for 37 Interactive Entertainment Network Technology Group suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, 37 Interactive Entertainment Network Technology Group has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 63%. As a result, 37 Interactive Entertainment Network Technology Group's ROE is not expected to change by much either, which we inferred from the analyst estimate of 20% for future ROE.

Conclusion

On the whole, we do feel that 37 Interactive Entertainment Network Technology Group has some positive attributes. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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.