Hangzhou Haoyue Personal Care Co., Ltd's (SHSE:605009) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that Hangzhou Haoyue Personal Care's (SHSE:605009) stock increased significantly by 30% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Hangzhou Haoyue Personal Care's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Hangzhou Haoyue Personal Care

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 Hangzhou Haoyue Personal Care is:

13% = CN¥423m ÷ CN¥3.2b (Based on the trailing twelve months to September 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¥0.13 in profit.

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. 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 Haoyue Personal Care's Earnings Growth And 13% ROE

To start with, Hangzhou Haoyue Personal Care's ROE looks acceptable. Especially when compared to the industry average of 9.9% the company's ROE looks pretty impressive. However, we are curious as to how the high returns still resulted in flat growth for Hangzhou Haoyue Personal Care in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Hangzhou Haoyue Personal Care's net income growth with the industry and found that the average industry growth rate was 6.4% in the same 5-year period.

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. Is Hangzhou Haoyue Personal Care fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hangzhou Haoyue Personal Care Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 49% (implying that the company keeps 51% of its income) over the last three years, Hangzhou Haoyue Personal Care has seen a negligible amount of growth in earnings as we saw above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Hangzhou Haoyue Personal Care has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

In total, it does look like Hangzhou Haoyue Personal Care has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.