Is Hangzhou Honghua Digital Technology Stock Company LTD.'s (SHSE:688789) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Hangzhou Honghua Digital Technology Stock (SHSE:688789) has had a great run on the share market with its stock up by a significant 20% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Hangzhou Honghua Digital Technology Stock's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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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 Hangzhou Honghua Digital Technology Stock is:

13% = CN¥420m ÷ CN¥3.1b (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.13.

See our latest analysis for Hangzhou Honghua Digital Technology Stock

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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Hangzhou Honghua Digital Technology Stock's Earnings Growth And 13% ROE

To begin with, Hangzhou Honghua Digital Technology Stock seems to have a respectable ROE. On comparing with the average industry ROE of 6.4% the company's ROE looks pretty remarkable. Probably as a result of this, Hangzhou Honghua Digital Technology Stock was able to see a decent growth of 20% over the last five years.

Next, on comparing with the industry net income growth, we found that Hangzhou Honghua Digital Technology Stock's growth is quite high when compared to the industry average growth of 7.1% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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 Honghua Digital Technology Stock's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hangzhou Honghua Digital Technology Stock Efficiently Re-investing Its Profits?

Hangzhou Honghua Digital Technology Stock has a low three-year median payout ratio of 21%, meaning that the company retains the remaining 79% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, Hangzhou Honghua Digital Technology Stock is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 31% over the next three years. Regardless, the future ROE for Hangzhou Honghua Digital Technology Stock is speculated to rise to 17% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

On the whole, we feel that Hangzhou Honghua Digital Technology Stock'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 are expected to accelerate. 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.

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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.