Is China East Education Holdings Limited's (HKG:667) Stock Price Struggling As A Result Of Its Mixed Financials?

It is hard to get excited after looking at China East Education Holdings' (HKG:667) recent performance, when its stock has declined 24% over the past three months. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to China East Education Holdings' ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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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 China East Education Holdings is:

11% = CN¥644m ÷ CN¥5.8b (Based on the trailing twelve months to June 2025).

The 'return' is the yearly profit. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.11 in profit.

View our latest analysis for China East Education Holdings

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

China East Education Holdings' Earnings Growth And 11% ROE

To begin with, China East Education Holdings seems to have a respectable ROE. Even when compared to the industry average of 11% the company's ROE looks quite decent. Despite the moderate return on equity, China East Education Holdings has posted a net income growth of 4.2% over the past five years. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

We then compared China East Education Holdings' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 6.1% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about China East Education Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is China East Education Holdings Making Efficient Use Of Its Profits?

China East Education Holdings' very high three-year median payout ratio of 117% suggests that the company is paying its shareholders more than what it is earning and it definitely contributes to the low earnings growth seen by the company. That's a huge risk in our books. To know the 2 risks we have identified for China East Education Holdings visit our risks dashboard for free.

Additionally, China East Education Holdings has paid dividends over a period of six years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 58% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 15%, over the same period.

Summary

Overall, we have mixed feelings about China East Education Holdings. In spite of the high ROE, the company has failed to see growth in its earnings due to it paying out most of its profits as dividend, with almost nothing left to invest into its own business. 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.

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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.