# China Lesso Group Holdings Limited's (HKG:2128) Stock Is Going Strong: Is the Market Following Fundamentals?

By
Simply Wall St
Published
January 12, 2022

Most readers would already be aware that China Lesso Group Holdings' (HKG:2128) stock increased significantly by 32% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to China Lesso Group Holdings' ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for China Lesso Group Holdings

### How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for China Lesso Group Holdings is:

20% = CN¥4.2b ÷ CN¥21b (Based on the trailing twelve months to June 2021).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each HK\$1 of shareholders' capital it has, the company made HK\$0.20 in profit.

### Why Is ROE Important For 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.

### A Side By Side comparison of China Lesso Group Holdings' Earnings Growth And 20% ROE

To start with, China Lesso Group Holdings' ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 15%. This probably laid the ground for China Lesso Group Holdings' moderate 17% net income growth seen over the past five years.

Next, on comparing China Lesso Group Holdings' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 16% in the same period.

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 China Lesso Group Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

### Is China Lesso Group Holdings Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 35% (implying that the company retains 65% of its profits), it seems that China Lesso Group Holdings is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, China Lesso Group Holdings 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 35% of its profits over the next three years. As a result, China Lesso Group Holdings' ROE is not expected to change by much either, which we inferred from the analyst estimate of 20% for future ROE.

### Conclusion

In total, we are pretty happy with China Lesso Group Holdings' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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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