Greentown Service Group Co. Ltd.'s (HKG:2869) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Greentown Service Group's (HKG:2869) recent performance, when its stock has declined 7.1% over the past week. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Greentown Service Group's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Greentown Service Group

How Do You 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 Greentown Service Group is:

9.8% = CN¥807m ÷ CN¥8.2b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.10.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Greentown Service Group's Earnings Growth And 9.8% ROE

When you first look at it, Greentown Service Group's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 5.4% which we definitely can't overlook. Yet, Greentown Service Group has posted measly growth of 2.3% over the past five years. 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 1.5% 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. This then helps them determine if the stock is placed for a bright or bleak future. Is Greentown Service Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Greentown Service Group Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 52% (or a retention ratio of 48%), most of Greentown Service Group's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Greentown Service Group has been paying dividends over a period of eight years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 63% over the next three years. However, Greentown Service Group's future ROE is expected to rise to 13% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

Overall, we feel that Greentown Service Group certainly does have some positive factors to consider. Especially the substantial growth in earnings backed by a decent ROE. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.