Wisdom Education International Holdings (HKG:6068) has had a rough month with its share price down 4.4%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Wisdom Education International Holdings' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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 Wisdom Education International Holdings is:
16% = CN¥502m ÷ CN¥3.1b (Based on the trailing twelve months to August 2020).
The 'return' is the profit over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.16 in profit.
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. 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. 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.
Wisdom Education International Holdings' Earnings Growth And 16% ROE
To begin with, Wisdom Education International Holdings seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 11%. This certainly adds some context to Wisdom Education International Holdings' exceptional 26% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that Wisdom Education International Holdings' growth is quite high when compared to the industry average growth of 19% 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. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is 6068 fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Wisdom Education International Holdings Efficiently Re-investing Its Profits?
Wisdom Education International Holdings' three-year median payout ratio is a pretty moderate 47%, meaning the company retains 53% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Wisdom Education International Holdings is reinvesting its earnings efficiently.
Additionally, Wisdom Education International Holdings has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 43%. However, Wisdom Education International Holdings' ROE is predicted to rise to 20% despite there being no anticipated change in its payout ratio.
On the whole, we feel that Wisdom Education International Holdings' performance has been quite good. 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. 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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This article by Simply Wall St is general in nature. 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.
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