Can Mixed Fundamentals Have A Negative Impact on Easyhome New Retail Group Corporation Limited (SZSE:000785) Current Share Price Momentum?

Easyhome New Retail Group's (SZSE:000785) stock is up by a considerable 28% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Easyhome New Retail Group's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Easyhome New Retail Group

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Easyhome New Retail Group is:

4.2% = CN¥902m ÷ CN¥21b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Easyhome New Retail Group's Earnings Growth And 4.2% ROE

It is hard to argue that Easyhome New Retail Group's ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 3.7%. Given the circumstances, the significant decline in net income by 18% seen by Easyhome New Retail Group over the last five years is not surprising.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 14% in the same 5-year period, we still found Easyhome New Retail Group's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Easyhome New Retail Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Easyhome New Retail Group Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 47% (where it is retaining 53% of its profits), Easyhome New Retail Group has seen a decline in earnings as we saw above. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Moreover, Easyhome New Retail Group has been paying dividends for five years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 17% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 5.5%, over the same period.

Conclusion

Overall, we have mixed feelings about Easyhome New Retail Group. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings 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. 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.