Declining Stock and Solid Fundamentals: Is The Market Wrong About Lesi Group Limited (HKG:2540)?

With its stock down 13% over the past three months, it is easy to disregard Lesi Group (HKG:2540). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Lesi Group's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Do You Calculate Return On Equity?

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 Lesi Group is:

8.9% = CN¥55m ÷ CN¥622m (Based on the trailing twelve months to June 2025).

The 'return' is the yearly profit. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.09 in profit.

See our latest analysis for Lesi Group

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. 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.

Lesi Group's Earnings Growth And 8.9% ROE

When you first look at it, Lesi Group's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 7.1% doesn't go unnoticed by us. However, Lesi Group's five year net income growth was quite low averaging at only 3.7%. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Therefore, the low growth in earnings could also be the result of this.

When you consider the fact that the industry earnings have shrunk at a rate of 2.7% in the same 5-year period, the company's net income growth is pretty remarkable.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Lesi Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Lesi Group Using Its Retained Earnings Effectively?

Lesi Group doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. However, this doesn't explain the low earnings growth the company has seen. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Conclusion

On the whole, we feel that Lesi Group's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 3 risks we have identified for Lesi Group.

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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.