Stock Analysis

Are Robust Financials Driving The Recent Rally In PDD Holdings Inc.'s (NASDAQ:PDD) Stock?

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NasdaqGS:PDD
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PDD Holdings (NASDAQ:PDD) has had a great run on the share market with its stock up by a significant 7.2% over the last week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study PDD Holdings' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for PDD Holdings

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 PDD Holdings is:

27% = CN¥29b ÷ CN¥107b (Based on the trailing twelve months to September 2022).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.27 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

PDD Holdings' Earnings Growth And 27% ROE

First thing first, we like that PDD Holdings has an impressive ROE. Further, even comparing with the industry average if 29%, the company's ROE is quite respectable. As a result, PDD Holdings' remarkable 57% net income growth seen over the past 5 years is likely aided by its high ROE.

Next, on comparing with the industry net income growth, we found that PDD Holdings' growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

past-earnings-growth
NasdaqGS:PDD Past Earnings Growth March 19th 2023

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is PDD worth today? The intrinsic value infographic in our free research report helps visualize whether PDD is currently mispriced by the market.

Is PDD Holdings Making Efficient Use Of Its Profits?

Given that PDD Holdings doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

On the whole, we feel that PDD Holdings' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Valuation is complex, but we're helping make it simple.

Find out whether PDD Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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