It is hard to get excited after looking at Hubei Century Network Technology's (SZSE:300494) recent performance, when its stock has declined 13% over the past month. However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Hubei Century Network Technology's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Is ROE Calculated?

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 Hubei Century Network Technology is:

6.5% = CN¥110m ÷ CN¥1.7b (Based on the trailing twelve months to March 2024).

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¥0.07 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. 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.

A Side By Side comparison of Hubei Century Network Technology's Earnings Growth And 6.5% ROE

When you first look at it, Hubei Century Network Technology's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 6.5%, so we won't completely dismiss the company. Looking at Hubei Century Network Technology's exceptional 33% five-year net income growth in particular, we are definitely impressed. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Hubei Century Network Technology'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 1.9%.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Hubei Century Network Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hubei Century Network Technology Making Efficient Use Of Its Profits?

Hubei Century Network Technology has a really low three-year median payout ratio of 9.5%, meaning that it has the remaining 91% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Additionally, Hubei Century Network Technology has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we do feel that Hubei Century Network Technology has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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.