Is Hexing Electrical Co.,Ltd.'s (SHSE:603556) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Hexing ElectricalLtd's (SHSE:603556) stock is up by a considerable 30% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Hexing ElectricalLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Hexing ElectricalLtd

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 Hexing ElectricalLtd is:

15% = CN¥1.0b ÷ CN¥6.9b (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¥0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Hexing ElectricalLtd's Earnings Growth And 15% ROE

At first glance, Hexing ElectricalLtd seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.3%. This certainly adds some context to Hexing ElectricalLtd's decent 18% net income growth seen over the past five years.

As a next step, we compared Hexing ElectricalLtd's 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 6.4%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Hexing ElectricalLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Hexing ElectricalLtd Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 49% (implying that the company retains 51% of its profits), it seems that Hexing ElectricalLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Hexing ElectricalLtd has been paying dividends over a period of seven years. 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 57%. However, Hexing ElectricalLtd's ROE is predicted to rise to 19% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we are pretty happy with Hexing ElectricalLtd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.

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