Ningbo Homelink Eco-iTech Co., Ltd.'s (SZSE:301193) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Ningbo Homelink Eco-iTech's (SZSE:301193) stock is up by a considerable 14% over the past week. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Ningbo Homelink Eco-iTech's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Ningbo Homelink Eco-iTech

How Is ROE Calculated?

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 Ningbo Homelink Eco-iTech is:

2.3% = CN¥43m ÷ CN¥1.8b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.02 in profit.

What Has ROE Got To Do With Earnings Growth?

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

A Side By Side comparison of Ningbo Homelink Eco-iTech's Earnings Growth And 2.3% ROE

It is hard to argue that Ningbo Homelink Eco-iTech's ROE is much good in and of itself. Even compared to the average industry ROE of 10%, the company's ROE is quite dismal. Hence, the flat earnings seen by Ningbo Homelink Eco-iTech over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 7.7% 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. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Ningbo Homelink Eco-iTech is trading on a high P/E or a low P/E, relative to its industry.

Is Ningbo Homelink Eco-iTech Making Efficient Use Of Its Profits?

Ningbo Homelink Eco-iTech has a low three-year median payout ratio of 25% (or a retention ratio of 75%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Additionally, Ningbo Homelink Eco-iTech started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 9.5% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 10%, over the same period.

Summary

Overall, we have mixed feelings about Ningbo Homelink Eco-iTech. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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.