With its stock down 12% over the past three months, it is easy to disregard Henglin Home FurnishingsLtd (SHSE:603661). 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 Henglin Home FurnishingsLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.
How Do You Calculate Return On Equity?
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 Henglin Home FurnishingsLtd is:
12% = CN¥422m ÷ CN¥3.7b (Based on the trailing twelve months to September 2023).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.12 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Henglin Home FurnishingsLtd's Earnings Growth And 12% ROE
To begin with, Henglin Home FurnishingsLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.3%. Probably as a result of this, Henglin Home FurnishingsLtd was able to see a decent growth of 15% over the last five years.
Next, on comparing with the industry net income growth, we found that Henglin Home FurnishingsLtd's growth is quite high when compared to the industry average growth of 7.0% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Henglin Home FurnishingsLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Henglin Home FurnishingsLtd Efficiently Re-investing Its Profits?
Henglin Home FurnishingsLtd has a low three-year median payout ratio of 15%, meaning that the company retains the remaining 85% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Besides, Henglin Home FurnishingsLtd has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.
Summary
In total, we are pretty happy with Henglin Home FurnishingsLtd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.