Will Weakness in DeHua TB New Decoration Material Co.,Ltd's (SZSE:002043) Stock Prove Temporary Given Strong Fundamentals?

DeHua TB New Decoration MaterialLtd (SZSE:002043) has had a rough month with its share price down 13%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on DeHua TB New Decoration MaterialLtd's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for DeHua TB New Decoration MaterialLtd

How Do You Calculate Return On Equity?

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 DeHua TB New Decoration MaterialLtd is:

22% = CN¥725m ÷ CN¥3.3b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.22 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

DeHua TB New Decoration MaterialLtd's Earnings Growth And 22% ROE

At first glance, DeHua TB New Decoration MaterialLtd seems to have a decent ROE. Especially when compared to the industry average of 5.7% the company's ROE looks pretty impressive. This probably laid the ground for DeHua TB New Decoration MaterialLtd's moderate 13% net income growth seen over the past five years.

We then compared DeHua TB New Decoration MaterialLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 1.0% 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. If you're wondering about DeHua TB New Decoration MaterialLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is DeHua TB New Decoration MaterialLtd Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 61% (or a retention ratio of 39%) for DeHua TB New Decoration MaterialLtd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, DeHua TB New Decoration MaterialLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 65%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 24%.

Conclusion

In total, we are pretty happy with DeHua TB New Decoration MaterialLtd's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.

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