PDD Holdings (NASDAQ:PDD) has had a rough month with its share price down 9.8%. 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. In this article, we decided to focus on PDD Holdings’ 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for PDD Holdings
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 PDD Holdings is:
39% = CN¥108b ÷ CN¥279b (Based on the trailing twelve months to September 2024).
The ‘return’ is the income the business earned over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.39.
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.
First thing first, we like that PDD Holdings has an impressive ROE. Secondly, even when compared to the industry average of 23% the company’s ROE is quite impressive. As a result, PDD Holdings’ exceptional 73% net income growth seen over the past five years, doesn’t come as a surprise.
We then compared PDD 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 18% in the same 5-year period.
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. Is PDD Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
