Tingyi (Cayman Islands) Holding (HKG:322) has had a great run on the share market with its stock up by a significant 16% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Tingyi (Cayman Islands) Holding'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Tingyi (Cayman Islands) Holding

How To 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 Tingyi (Cayman Islands) Holding is:

24% = CN¥3.8b ÷ CN¥16b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.24 in profit.

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. 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. 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.

Tingyi (Cayman Islands) Holding's Earnings Growth And 24% ROE

First thing first, we like that Tingyi (Cayman Islands) Holding has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 6.0% also doesn't go unnoticed by us. As you might expect, the 2.0% net income decline reported by Tingyi (Cayman Islands) Holding doesn't bode well with us. We reckon that there could be some other factors at play here that are preventing the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

Next, we compared Tingyi (Cayman Islands) Holding's performance against the industry and found that the industry shrunk its earnings at 4.0% in the same period, which suggests that the company's earnings have been shrinking at a slower rate than its industry, This does appease the negative sentiment around the company to a certain extent.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 322? You can find out in our latest intrinsic value infographic research report.

Is Tingyi (Cayman Islands) Holding Making Efficient Use Of Its Profits?

Looking at its three-year median payout ratio of 50% (or a retention ratio of 50%) which is pretty normal, Tingyi (Cayman Islands) Holding's declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Tingyi (Cayman Islands) Holding has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 101% over the next three years. Regardless, the future ROE for Tingyi (Cayman Islands) Holding is speculated to rise to 30% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

Overall, we feel that Tingyi (Cayman Islands) Holding certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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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