With its stock down 7.6% over the past week, it is easy to disregard Wuxi Huaguang Environment & Energy GroupLtd (SHSE:600475). 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 Wuxi Huaguang Environment & Energy GroupLtd's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Is ROE Calculated?
ROE 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 Wuxi Huaguang Environment & Energy GroupLtd is:
9.6% = CN¥944m ÷ CN¥9.9b (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.10 in profit.
What Is The Relationship Between ROE And 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.
Wuxi Huaguang Environment & Energy GroupLtd's Earnings Growth And 9.6% ROE
At first glance, Wuxi Huaguang Environment & Energy GroupLtd's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 7.5% which we definitely can't overlook. This probably goes some way in explaining Wuxi Huaguang Environment & Energy GroupLtd's moderate 14% growth over the past five years amongst other factors. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.
As a next step, we compared Wuxi Huaguang Environment & Energy GroupLtd'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. 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. Is Wuxi Huaguang Environment & Energy GroupLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Wuxi Huaguang Environment & Energy GroupLtd Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 37% (implying that the company retains 63% of its profits), it seems that Wuxi Huaguang Environment & Energy GroupLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Moreover, Wuxi Huaguang Environment & Energy GroupLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.
Summary
Overall, we are quite pleased with Wuxi Huaguang Environment & Energy GroupLtd's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.