Hunan TV & Broadcast Intermediary (SZSE:000917) has had a great run on the share market with its stock up by a significant 24% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Hunan TV & Broadcast Intermediary's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Hunan TV & Broadcast Intermediary

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Hunan TV & Broadcast Intermediary is:

3.8% = CN¥426m ÷ CN¥11b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.04.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Hunan TV & Broadcast Intermediary's Earnings Growth And 3.8% ROE

It is hard to argue that Hunan TV & Broadcast Intermediary's ROE is much good in and of itself. Even compared to the average industry ROE of 6.1%, the company's ROE is quite dismal. Hunan TV & Broadcast Intermediary was still able to see a decent net income growth of 19% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Hunan TV & Broadcast Intermediary's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 1.6% in the same 5-year period.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Hunan TV & Broadcast Intermediary is trading on a high P/E or a low P/E, relative to its industry.

Is Hunan TV & Broadcast Intermediary Efficiently Re-investing Its Profits?

In Hunan TV & Broadcast Intermediary's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 8.7% (or a retention ratio of 91%), which suggests that the company is investing most of its profits to grow its business.

Additionally, Hunan TV & Broadcast Intermediary has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we feel that Hunan TV & Broadcast Intermediary certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.