Do Its Financials Have Any Role To Play In Driving HangZhou Everfine Photo-e-info Co., Ltd.'s (SZSE:300306) Stock Up Recently?

HangZhou Everfine Photo-e-info (SZSE:300306) has had a great run on the share market with its stock up by a significant 26% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on HangZhou Everfine Photo-e-info's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for HangZhou Everfine Photo-e-info

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 HangZhou Everfine Photo-e-info is:

6.5% = CN¥97m ÷ CN¥1.5b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.07.

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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

HangZhou Everfine Photo-e-info's Earnings Growth And 6.5% ROE

When you first look at it, HangZhou Everfine Photo-e-info's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 6.4%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that HangZhou Everfine Photo-e-info's net income grew significantly at a rate of 38% over the last five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared HangZhou Everfine Photo-e-info'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 4.7%.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 HangZhou Everfine Photo-e-info is trading on a high P/E or a low P/E, relative to its industry.

Is HangZhou Everfine Photo-e-info Efficiently Re-investing Its Profits?

HangZhou Everfine Photo-e-info has a significant three-year median payout ratio of 86%, meaning the company only retains 14% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Moreover, HangZhou Everfine Photo-e-info 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.

Conclusion

On the whole, we do feel that HangZhou Everfine Photo-e-info has some positive attributes. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. Up till now, we've only made a short study of the company's growth data. To gain further insights into HangZhou Everfine Photo-e-info's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.