It is hard to get excited after looking at Green Future Food Hydrocolloid Marine Science's (HKG:1084) recent performance, when its stock has declined 17% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Green Future Food Hydrocolloid Marine Science's 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.

Check out our latest analysis for Green Future Food Hydrocolloid Marine Science

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 Green Future Food Hydrocolloid Marine Science is:

12% = HK$104m ÷ HK$862m (Based on the trailing twelve months to December 2021).

The 'return' is the profit over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.12 in profit.

Why Is ROE Important For 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. 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.

Green Future Food Hydrocolloid Marine Science's Earnings Growth And 12% ROE

To start with, Green Future Food Hydrocolloid Marine Science's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 12%. Green Future Food Hydrocolloid Marine Science's decent returns aren't reflected in Green Future Food Hydrocolloid Marine Science'smediocre five year net income growth average of 4.0%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Green Future Food Hydrocolloid Marine Science's reported growth was lower than the industry growth of 18% in the same period, which is not something we like to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Green Future Food Hydrocolloid Marine Science fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Green Future Food Hydrocolloid Marine Science Efficiently Re-investing Its Profits?

While Green Future Food Hydrocolloid Marine Science has a decent three-year median payout ratio of 49% (or a retention ratio of 51%), it has seen very little growth in earnings. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Green Future Food Hydrocolloid Marine Science only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Conclusion

In total, it does look like Green Future Food Hydrocolloid Marine Science has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for Green Future Food Hydrocolloid Marine Science visit our risks dashboard for free.

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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.