Yadea Group Holdings' (HKG:1585) stock up by 4.1% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Yadea Group Holdings' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Yadea Group Holdings

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Yadea Group Holdings is:

31% = CN¥2.5b ÷ CN¥8.1b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.31.

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 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 Yadea Group Holdings' Earnings Growth And 31% ROE

First thing first, we like that Yadea Group Holdings has an impressive ROE. Secondly, even when compared to the industry average of 16% the company's ROE is quite impressive. So, the substantial 33% net income growth seen by Yadea Group Holdings over the past five years isn't overly surprising.

We then compared Yadea Group Holdings' 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 15% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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. Is 1585 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Yadea Group Holdings Efficiently Re-investing Its Profits?

Yadea Group Holdings has a three-year median payout ratio of 43% (where it is retaining 57% of its income) which is not too low or not too high. So it seems that Yadea Group Holdings is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Yadea Group Holdings has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 47% of its profits over the next three years. Accordingly, forecasts suggest that Yadea Group Holdings' future ROE will be 29% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Yadea Group Holdings' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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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