Are Strong Financial Prospects The Force That Is Driving The Momentum In Victory Giant Technology (HuiZhou)Co.,Ltd.'s SZSE:300476) Stock?

Most readers would already be aware that Victory Giant Technology (HuiZhou)Co.Ltd's (SZSE:300476) stock increased significantly by 26% over the past 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. Particularly, we will be paying attention to Victory Giant Technology (HuiZhou)Co.Ltd's ROE today.

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 Victory Giant Technology (HuiZhou)Co.Ltd

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 Victory Giant Technology (HuiZhou)Co.Ltd is:

9.7% = CN¥756m ÷ CN¥7.8b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.10.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Victory Giant Technology (HuiZhou)Co.Ltd's Earnings Growth And 9.7% ROE

At first glance, Victory Giant Technology (HuiZhou)Co.Ltd's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 6.3% which we definitely can't overlook. This probably goes some way in explaining Victory Giant Technology (HuiZhou)Co.Ltd's moderate 12% growth over the past five years amongst other factors. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. 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 Victory Giant Technology (HuiZhou)Co.Ltd's growth is quite high when compared to the industry average growth of 6.4% in the same period, which is great to see.

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. Doing so will help them establish if the stock's future looks promising or ominous. 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 Victory Giant Technology (HuiZhou)Co.Ltd is trading on a high P/E or a low P/E, relative to its industry.

Is Victory Giant Technology (HuiZhou)Co.Ltd Efficiently Re-investing Its Profits?

Victory Giant Technology (HuiZhou)Co.Ltd has a low three-year median payout ratio of 22%, meaning that the company retains the remaining 78% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Additionally, Victory Giant Technology (HuiZhou)Co.Ltd has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we feel that Victory Giant Technology (HuiZhou)Co.Ltd's performance has been quite good. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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

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