MeiHua Holdings Group Co.,Ltd's (SHSE:600873) Stock Been Rising: Are Strong Financials Guiding The Market?

Most readers would already know that MeiHua Holdings GroupLtd's (SHSE:600873) stock increased by 5.0% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on MeiHua Holdings GroupLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for MeiHua Holdings GroupLtd

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for MeiHua Holdings GroupLtd is:

21% = CN¥3.1b ÷ CN¥15b (Based on the trailing twelve months to March 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¥0.21.

Why Is ROE Important For 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. 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 MeiHua Holdings GroupLtd's Earnings Growth And 21% ROE

At first glance, MeiHua Holdings GroupLtd seems to have a decent ROE. Especially when compared to the industry average of 8.1% the company's ROE looks pretty impressive. This certainly adds some context to MeiHua Holdings GroupLtd's exceptional 31% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that MeiHua Holdings GroupLtd's growth is quite high when compared to the industry average growth of 2.9% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about MeiHua Holdings GroupLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is MeiHua Holdings GroupLtd Efficiently Re-investing Its Profits?

MeiHua Holdings GroupLtd's three-year median payout ratio is a pretty moderate 39%, meaning the company retains 61% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like MeiHua Holdings GroupLtd is reinvesting its earnings efficiently.

Additionally, MeiHua Holdings GroupLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 37%. Accordingly, forecasts suggest that MeiHua Holdings GroupLtd's future ROE will be 18% which is again, similar to the current ROE.

Summary

On the whole, we feel that MeiHua Holdings GroupLtd's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

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

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.