Declining Stock and Solid Fundamentals: Is The Market Wrong About Yadea Group Holdings Ltd. (HKG:1585)?

Yadea Group Holdings (HKG:1585) has had a rough three months with its share price down 37%. 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 Yadea Group Holdings' 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.

Check out our latest analysis for Yadea Group Holdings

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 Yadea Group Holdings is:

31% = CN¥2.6b ÷ CN¥8.4b (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.31 in profit.

What Has ROE Got To Do With 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.

Yadea Group Holdings' Earnings Growth And 31% ROE

First thing first, we like that Yadea Group Holdings has an impressive ROE. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. So, the substantial 37% net income growth seen by Yadea Group Holdings over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Yadea Group Holdings' growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Yadea Group Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Yadea Group Holdings Using Its Retained Earnings Effectively?

Yadea Group Holdings' three-year median payout ratio is a pretty moderate 43%, meaning the company retains 57% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Yadea Group Holdings is reinvesting its earnings efficiently.

Moreover, Yadea Group Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. 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 48%. Accordingly, forecasts suggest that Yadea Group Holdings' future ROE will be 32% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Yadea Group Holdings' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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