Are Robust Financials Driving The Recent Rally In Gree Electric Appliances, Inc. of Zhuhai's (SZSE:000651) Stock?

Most readers would already be aware that Gree Electric Appliances of Zhuhai's (SZSE:000651) stock increased significantly by 7.1% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Gree Electric Appliances of Zhuhai'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Gree Electric Appliances of Zhuhai

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Gree Electric Appliances of Zhuhai is:

23% = CN¥29b ÷ CN¥130b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.23 in profit.

What Is The Relationship Between ROE And 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. 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.

Gree Electric Appliances of Zhuhai's Earnings Growth And 23% ROE

To start with, Gree Electric Appliances of Zhuhai's ROE looks acceptable. Especially when compared to the industry average of 9.3% the company's ROE looks pretty impressive. This certainly adds some context to Gree Electric Appliances of Zhuhai's decent 6.8% net income growth seen over the past five years.

We then performed a comparison between Gree Electric Appliances of Zhuhai's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 8.1% 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). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 000651? You can find out in our latest intrinsic value infographic research report.

Is Gree Electric Appliances of Zhuhai Making Efficient Use Of Its Profits?

Gree Electric Appliances of Zhuhai has a healthy combination of a moderate three-year median payout ratio of 44% (or a retention ratio of 56%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, Gree Electric Appliances of Zhuhai is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 37%. Regardless, Gree Electric Appliances of Zhuhai's ROE is speculated to decline to 16% despite there being no anticipated change in its payout ratio.

Summary

In total, we are pretty happy with Gree Electric Appliances of Zhuhai's performance. 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. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.