E Lighting Group Holdings (HKG:8222) has had a strong run in the stock market, with its stock rising 27% in the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. In particular, we will pay attention to the ROE of E Lighting Group Holdings today.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.
See our latest analysis for E Lighting Group Holdings
How is ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for E Lighting Group Holdings is:
24% = HK$6.7 million ÷ HK$28 million (based on trailing 12 months to December 2021).
The “yield” is the profit of the last twelve months. This therefore means that for each investment of 1 HK$ invested by its shareholder, the company generates a profit of 0.24 HK$.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
E Lighting Group Holdings earnings growth and 24% ROE
For starters, E Lighting Group Holdings has a pretty high ROE, which is interesting. Additionally, the company’s ROE is above the industry average of 12%, which is quite remarkable. Under these circumstances, a considerable five-year net profit growth of 42% for E Lighting Group Holdings was to be expected.
We then compared the net profit growth of E Lighting Group Holdings with the industry and we are happy to see that the growth figure of the company is higher compared to the industry which has a growth rate of 4.7% over the same period.
Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. Is E Lighting Group Holdings fairly valued relative to other companies? These 3 assessment metrics might help you decide.
Does E Lighting Group Holdings use its profits efficiently?
Since E Lighting Group Holdings does not pay any dividends to its shareholders, we infer that the company has reinvested all its profits to grow its business.
Overall, we are quite satisfied with the performance of E Lighting Group Holdings. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. If the company continues to increase its earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Not to mention that stock price results also depend on the potential risks a company may face. It is therefore important for investors to be aware of the risks associated with the business. To learn about the 2 risks we have identified for E Lighting Group Holdings, visit our risk dashboard for free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.