Hangzhou Fortune Gas Cryogenic Group (SHSE:603173) has had a rough three months with its share price down 21%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Hangzhou Fortune Gas Cryogenic Group's ROE.
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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Hangzhou Fortune Gas Cryogenic Group
How Do You Calculate Return On Equity?
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 Hangzhou Fortune Gas Cryogenic Group is:
13% = CN¥181m ÷ CN¥1.4b (Based on the trailing twelve months to June 2023).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.13 in profit.
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. 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. 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.
Hangzhou Fortune Gas Cryogenic Group's Earnings Growth And 13% ROE
At first glance, Hangzhou Fortune Gas Cryogenic Group seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 7.9%. This certainly adds some context to Hangzhou Fortune Gas Cryogenic Group's exceptional 24% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared Hangzhou Fortune Gas Cryogenic Group'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 11%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Hangzhou Fortune Gas Cryogenic Group is trading on a high P/E or a low P/E, relative to its industry.
Is Hangzhou Fortune Gas Cryogenic Group Using Its Retained Earnings Effectively?
Hangzhou Fortune Gas Cryogenic Group has a really low three-year median payout ratio of 12%, meaning that it has the remaining 88% left over to reinvest into its business. So it looks like Hangzhou Fortune Gas Cryogenic Group is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Conclusion
In total, we are pretty happy with Hangzhou Fortune Gas Cryogenic 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.
