Hicon Network Technology (Shandong)Ltd (SZSE:301262) has had a rough month with its share price down 14%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Hicon Network Technology (Shandong)Ltd's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Is ROE Calculated?

Return on equity 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 Hicon Network Technology (Shandong)Ltd is:

11% = CN¥394m ÷ CN¥3.7b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.11 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Hicon Network Technology (Shandong)Ltd's Earnings Growth And 11% ROE

On the face of it, Hicon Network Technology (Shandong)Ltd's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 7.0% which we definitely can't overlook. Consequently, this likely laid the ground for the decent growth of 6.9% seen over the past five years by Hicon Network Technology (Shandong)Ltd. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing Hicon Network Technology (Shandong)Ltd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 6.9% over the last few years.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 301262 worth today? The intrinsic value infographic in our free research report helps visualize whether 301262 is currently mispriced by the market.

Is Hicon Network Technology (Shandong)Ltd Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 79% (or a retention ratio of 21%) for Hicon Network Technology (Shandong)Ltd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

While Hicon Network Technology (Shandong)Ltd has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Conclusion

On the whole, we do feel that Hicon Network Technology (Shandong)Ltd has some positive attributes. Especially the substantial growth in earnings backed by a decent ROE. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.