Greentown Management Holdings (HKG:9979) has had a great run on the share market with its stock up by a significant 41% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Greentown Management Holdings' ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Greentown Management Holdings

How To Calculate Return On Equity?

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 Greentown Management Holdings is:

19% = CN¥660m ÷ CN¥3.5b (Based on the trailing twelve months to June 2022).

The 'return' is the yearly profit. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.19.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of Greentown Management Holdings' Earnings Growth And 19% ROE

To start with, Greentown Management Holdings' ROE looks acceptable. On comparing with the average industry ROE of 6.8% the company's ROE looks pretty remarkable. This certainly adds some context to Greentown Management Holdings' exceptional 21% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Greentown Management Holdings compares quite favourably to the industry average, which shows a decline of 1.6% in the same 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. If you're wondering about Greentown Management Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Greentown Management Holdings Making Efficient Use Of Its Profits?

Greentown Management Holdings' significant three-year median payout ratio of 63% (where it is retaining only 37% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Along with seeing a growth in earnings, Greentown Management Holdings only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 65% of its profits over the next three years. Still, forecasts suggest that Greentown Management Holdings' future ROE will rise to 24% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we feel that Greentown Management Holdings' performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.