Will Weakness in Desun Real Estate Investment Services Group Co., Ltd.'s (HKG:2270) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at Desun Real Estate Investment Services Group's (HKG:2270) recent performance, when its stock has declined 15% over the past month. 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 Desun Real Estate Investment Services Group's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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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 Desun Real Estate Investment Services Group is:

14% = CN¥38m ÷ CN¥274m (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.14 in profit.

Check out our latest analysis for Desun Real Estate Investment Services Group

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. 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.

Desun Real Estate Investment Services Group's Earnings Growth And 14% ROE

To start with, Desun Real Estate Investment Services Group's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 4.1%. However, we are curious as to how the high returns still resulted in flat growth for Desun Real Estate Investment Services Group in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

When you consider the fact that the industry earnings have shrunk at a rate of 2.2% 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. 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 Desun Real Estate Investment Services Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Desun Real Estate Investment Services Group Efficiently Re-investing Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a regular dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

Overall, we are quite pleased with Desun Real Estate Investment Services Group's 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. Up till now, we've only made a short study of the company's growth data. To gain further insights into Desun Real Estate Investment Services Group's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.