Hongmian Zhihui Science and Technology Innovation Co.,Ltd.Guangzhou's (SZSE:000523) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou (SZSE:000523) has had a great run on the share market with its stock up by a significant 25% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou is:

8.2% = CN¥132m ÷ CN¥1.6b (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¥0.08 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's Earnings Growth And 8.2% ROE

At first glance, Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 5.4%, is definitely interesting. Even more so after seeing Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's exceptional 26% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So, there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou compares quite favourably to the industry average, which shows a decline of 0.9% over the last few years.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou is trading on a high P/E or a low P/E, relative to its industry.

Is Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou Efficiently Re-investing Its Profits?

Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

In total, we are pretty happy with Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard will have the 1 risk we have identified for Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou.

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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.