Is Doctorglasses Chain Co.,Ltd.'s (SZSE:300622) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that Doctorglasses ChainLtd's (SZSE:300622) stock increased significantly by 122% over the past three months. 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 Doctorglasses ChainLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Doctorglasses ChainLtd

How Is ROE Calculated?

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 Doctorglasses ChainLtd is:

14% = CN¥115m ÷ CN¥801m (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.14 in profit.

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 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.

Doctorglasses ChainLtd's Earnings Growth And 14% ROE

To start with, Doctorglasses ChainLtd's ROE looks acceptable. Especially when compared to the industry average of 7.1% the company's ROE looks pretty impressive. This probably laid the ground for Doctorglasses ChainLtd's moderate 16% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Doctorglasses ChainLtd's growth is quite high when compared to the industry average growth of 6.1% 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). This then helps them determine if the stock is placed for a bright or bleak future. 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 Doctorglasses ChainLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Doctorglasses ChainLtd Efficiently Re-investing Its Profits?

Doctorglasses ChainLtd has a significant three-year median payout ratio of 89%, meaning that it is left with only 11% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Moreover, Doctorglasses ChainLtd is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.

Summary

Overall, we are quite pleased with Doctorglasses ChainLtd's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.