Chow Tai Fook Jewellery Group (HKG:1929) has had a rough month with its share price down 13%. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Chow Tai Fook Jewellery Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How To 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 Chow Tai Fook Jewellery Group is:

25% = HK$6.7b ÷ HK$27b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.25 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. 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 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.

Chow Tai Fook Jewellery Group's Earnings Growth And 25% ROE

Firstly, we acknowledge that Chow Tai Fook Jewellery Group has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 11% also doesn't go unnoticed by us. Probably as a result of this, Chow Tai Fook Jewellery Group was able to see a decent net income growth of 12% over the last five years.

When you consider the fact that the industry earnings have shrunk at a rate of 0.9% in the same 5-year period, the company's net income growth is pretty remarkable.

Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for 1929? You can find out in our latest intrinsic value infographic research report.

Is Chow Tai Fook Jewellery Group Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 76% (or a retention ratio of 24%) for Chow Tai Fook Jewellery Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Chow Tai Fook Jewellery Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 71%. Accordingly, forecasts suggest that Chow Tai Fook Jewellery Group's future ROE will be 28% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with Chow Tai Fook Jewellery Group's performance. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.