Most readers would already be aware that Hoshine Silicon Industry's (SHSE:603260) stock increased significantly by 12% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Hoshine Silicon Industry's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Hoshine Silicon Industry
How Is ROE Calculated?
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 Hoshine Silicon Industry is:
33% = CN¥7.7b ÷ CN¥23b (Based on the trailing twelve months to September 2022).
The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.33.
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. 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.
Hoshine Silicon Industry's Earnings Growth And 33% ROE
First thing first, we like that Hoshine Silicon Industry has an impressive ROE. Secondly, even when compared to the industry average of 9.7% the company's ROE is quite impressive. Under the circumstances, Hoshine Silicon Industry's considerable five year net income growth of 39% was to be expected.
As a next step, we compared Hoshine Silicon Industry's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 20%.
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. Doing so will help them establish if the stock's future looks promising or ominous. Is Hoshine Silicon Industry fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Hoshine Silicon Industry Efficiently Re-investing Its Profits?
Hoshine Silicon Industry's ' three-year median payout ratio is on the lower side at 19% implying that it is retaining a higher percentage (81%) of its profits. So it looks like Hoshine Silicon Industry is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Additionally, Hoshine Silicon Industry has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 32% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 23% over the same period.
Summary
Overall, we are quite pleased with Hoshine Silicon Industry's performance. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
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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.