Hubei Feilihua Quartz Glass Co., Ltd.'s (SZSE:300395) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Hubei Feilihua Quartz Glass (SZSE:300395) has had a great run on the share market with its stock up by a significant 45% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Hubei Feilihua Quartz Glass' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Hubei Feilihua Quartz Glass

How To Calculate Return On Equity?

ROE 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 Hubei Feilihua Quartz Glass is:

8.2% = CN¥381m ÷ CN¥4.7b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.08 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. 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.

Hubei Feilihua Quartz Glass' Earnings Growth And 8.2% ROE

When you first look at it, Hubei Feilihua Quartz Glass' ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 6.2%, is definitely interesting. This probably goes some way in explaining Hubei Feilihua Quartz Glass' moderate 19% growth over the past five years amongst other factors. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

As a next step, we compared Hubei Feilihua Quartz Glass' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.9%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Hubei Feilihua Quartz Glass''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hubei Feilihua Quartz Glass Efficiently Re-investing Its Profits?

Hubei Feilihua Quartz Glass' three-year median payout ratio to shareholders is 20% (implying that it retains 80% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, Hubei Feilihua Quartz Glass 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. 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 23%. Regardless, the future ROE for Hubei Feilihua Quartz Glass is predicted to rise to 15% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we are quite pleased with Hubei Feilihua Quartz Glass' 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.