It is hard to get excited after looking at Xuan Wu Cloud Technology Holdings' (HKG:2392) recent performance, when its stock has declined 22% over the past month. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company's financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Xuan Wu Cloud Technology Holdings' ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Xuan Wu Cloud Technology Holdings

How Do You 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 Xuan Wu Cloud Technology Holdings is:

3.3% = CN¥9.4m ÷ CN¥284m (Based on the trailing twelve months to June 2022).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.03 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.

Xuan Wu Cloud Technology Holdings' Earnings Growth And 3.3% ROE

As you can see, Xuan Wu Cloud Technology Holdings' ROE looks pretty weak. Further, we noted that the company's ROE is similar to the industry average of 3.4%. Therefore, it might not be wrong to say that the five year net income decline of 27% seen by Xuan Wu Cloud Technology Holdings was possibly a result of the disappointing ROE.

However, when we compared Xuan Wu Cloud Technology Holdings' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 6.7% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Xuan Wu Cloud Technology Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Xuan Wu Cloud Technology Holdings Efficiently Re-investing Its Profits?

Because Xuan Wu Cloud Technology Holdings doesn't pay any dividends, we infer that it is retaining all of its profits, which is rather perplexing when you consider the fact that there is no earnings growth to show for it. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Summary

Overall, we have mixed feelings about Xuan Wu Cloud Technology Holdings. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.