Beijing eGOVA Co,. Ltd's (SZSE:300075) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Beijing eGOVA Co's (SZSE:300075) recent performance, when its stock has declined 14% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Beijing eGOVA Co's ROE.

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

See our latest analysis for Beijing eGOVA Co

How Do You Calculate Return On Equity?

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 Beijing eGOVA Co is:

6.3% = CN¥259m ÷ CN¥4.1b (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.06 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.

Beijing eGOVA Co's Earnings Growth And 6.3% ROE

On the face of it, Beijing eGOVA Co's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 5.2% which we definitely can't overlook. This probably goes some way in explaining Beijing eGOVA Co's moderate 18% 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.

Next, on comparing with the industry net income growth, we found that Beijing eGOVA Co's growth is quite high when compared to the industry average growth of 6.6% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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 Beijing eGOVA Co's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Beijing eGOVA Co Using Its Retained Earnings Effectively?

In Beijing eGOVA Co's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 9.9% (or a retention ratio of 90%), which suggests that the company is investing most of its profits to grow its business.

Moreover, Beijing eGOVA Co is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. 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 11%. Regardless, the future ROE for Beijing eGOVA Co is predicted to rise to 10% despite there being not much change expected in its payout ratio.

Summary

In total, we are pretty happy with Beijing eGOVA Co's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.