Chow Tai Fook Jewellery Group Limited's (HKG:1929) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Chow Tai Fook Jewellery Group (HKG:1929) has had a rough week with its share price down 9.1%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Chow Tai Fook Jewellery Group's ROE.

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.

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How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Chow Tai Fook Jewellery Group is:

22% = HK$6.0b ÷ HK$27b (Based on the trailing twelve months to March 2025).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.22 in profit.

See our latest analysis for Chow Tai Fook Jewellery 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. 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.

Chow Tai Fook Jewellery Group's Earnings Growth And 22% ROE

To begin with, Chow Tai Fook Jewellery Group seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 5.6%. Despite this, Chow Tai Fook Jewellery Group's five year net income growth was quite low averaging at only 4.7%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.

We then performed a comparison between Chow Tai Fook Jewellery Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 5.3% in the same 5-year period.

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. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 1929? You can find out in our latest intrinsic value infographic research report.

Is Chow Tai Fook Jewellery Group Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 85% (that is, the company retains only 15% of its income) over the past three years for Chow Tai Fook Jewellery Group suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, Chow Tai Fook Jewellery Group has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 82%. Regardless, the future ROE for Chow Tai Fook Jewellery Group is predicted to rise to 31% despite there being not much change expected in its payout ratio.

Summary

On the whole, we do feel that Chow Tai Fook Jewellery Group has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.