Hangzhou Fortune Gas Cryogenic Group Co., Ltd. (SHSE:603173) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 11% over the past week, it is easy to disregard Hangzhou Fortune Gas Cryogenic Group (SHSE:603173). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Hangzhou Fortune Gas Cryogenic Group's ROE.

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

View our latest analysis for Hangzhou Fortune Gas Cryogenic Group

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Hangzhou Fortune Gas Cryogenic Group is:

15% = CN¥222m ÷ CN¥1.5b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.15.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Hangzhou Fortune Gas Cryogenic Group's Earnings Growth And 15% ROE

To begin with, Hangzhou Fortune Gas Cryogenic Group seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.8%. Probably as a result of this, Hangzhou Fortune Gas Cryogenic Group was able to see a decent growth of 15% over the last five years.

Next, on comparing with the industry net income growth, we found that Hangzhou Fortune Gas Cryogenic Group's growth is quite high when compared to the industry average growth of 9.4% in the same period, which is great to see.

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 Hangzhou Fortune Gas Cryogenic Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hangzhou Fortune Gas Cryogenic Group Efficiently Re-investing Its Profits?

In Hangzhou Fortune Gas Cryogenic Group's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 12% (or a retention ratio of 88%), which suggests that the company is investing most of its profits to grow its business.

While Hangzhou Fortune Gas Cryogenic Group has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Conclusion

On the whole, we feel that Hangzhou Fortune Gas Cryogenic Group's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 1 risk we have identified for Hangzhou Fortune Gas Cryogenic Group by visiting our risks dashboard for free on our platform here.

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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.