Hangzhou Greatstar Industrial Co., Ltd's (SZSE:002444) Stock Has Fared Decently: Is the Market Following Strong Financials?

Most readers would already know that Hangzhou Greatstar Industrial's (SZSE:002444) stock increased by 4.3% over the past week. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Hangzhou Greatstar Industrial's ROE.

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.

See our latest analysis for Hangzhou Greatstar Industrial

How Do You Calculate Return On Equity?

ROE 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 Greatstar Industrial is:

12% = CN¥1.8b ÷ CN¥15b (Based on the trailing twelve months to March 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¥0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

Hangzhou Greatstar Industrial's Earnings Growth And 12% ROE

At first glance, Hangzhou Greatstar Industrial seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 9.8%. This probably laid the ground for Hangzhou Greatstar Industrial's moderate 14% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Hangzhou Greatstar Industrial's growth is quite high when compared to the industry average growth of 5.7% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Greatstar Industrial's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hangzhou Greatstar Industrial Making Efficient Use Of Its Profits?

Hangzhou Greatstar Industrial's three-year median payout ratio to shareholders is 19% (implying that it retains 81% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, Hangzhou Greatstar Industrial 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

Overall, we are quite pleased with Hangzhou Greatstar Industrial's performance. 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.

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