Hydsoft TechnologyLtd (SZSE:301316) has had a rough three months with its share price down 23%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Hydsoft TechnologyLtd’s ROE today.
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. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
Check out our latest analysis for Hydsoft TechnologyLtd
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Hydsoft TechnologyLtd is:
8.1% = CN¥85m ÷ CN¥1.1b (Based on the trailing twelve months to September 2023).
The ‘return’ is the yearly profit. That means that for every CN¥1 worth of shareholders’ equity, the company generated CN¥0.08 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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.
A Side By Side comparison of Hydsoft TechnologyLtd’s Earnings Growth And 8.1% ROE
At first glance, Hydsoft TechnologyLtd’s ROE doesn’t look very promising. However, the fact that the its ROE is quite higher to the industry average of 5.6% doesn’t go unnoticed by us. Particularly, the substantial 20% net income growth seen by Hydsoft TechnologyLtd over the past five years is impressive . Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So, there might well be other reasons for the earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.
As a next step, we compared Hydsoft TechnologyLtd’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.5%.
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). This then helps them determine if the stock is placed for a bright or bleak future. Is Hydsoft TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Hydsoft TechnologyLtd Using Its Retained Earnings Effectively?
Hydsoft TechnologyLtd’s three-year median payout ratio is a pretty moderate 35%, meaning the company retains 65% of its income. By the looks of it, the dividend is well covered and Hydsoft TechnologyLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
While Hydsoft TechnologyLtd 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.
Summary
Overall, we are quite pleased with Hydsoft TechnologyLtd’s performance. In particular, it’s great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let’s not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 1 risk we have identified for Hydsoft TechnologyLtd visit our risks dashboard for free.
Valuation is complex, but we’re helping make it simple.
Find out whether Hydsoft TechnologyLtd is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
