Digital China Holdings (HKG: 861) shares have risen significantly by 19% in the past week. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . Specifically, we have decided to study the ROE of Digital China Holdings in this article.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
Check out our latest analysis for Digital China Holdings
How is the ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of Digital China Holdings is:
6.6% = HK $ 925 million Ã· HK $ 14 billion (based on the last twelve months to June 2021).
The “return” is the income the business has earned over the past year. One way to conceptualize this is that for every HK $ 1 of shareholder capital it has, the company has made HK $ 0.07 in profit.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess the profits that the business is reinvesting or âwithholdingâ for future growth, which then gives us an idea of ââthe growth potential of the business. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A Side-by-Side Comparison of Digital China Holdings’ Profit Growth and 6.6% ROE
At first glance, Digital China Holdings’ ROE does not look so attractive. We then compared the company’s ROE to that of the industry as a whole and were disappointed to see that the ROE is 10% below the industry average. Despite this, Digital China Holdings has been able to significantly increase its bottom line, at a rate of 66% over the past five years. So, there might be other aspects that positively influence the profit growth of the company. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
In a next step, we compared Digital China Holdings’ net income growth with the industry and luckily we found that the growth observed by the company is above the industry average growth of 16%.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. If you’re wondering about the valuation of Digital China Holdings, check out this gauge of its price / earnings ratio, relative to its industry.
Is Digital China Holdings Efficiently Reinvesting Its Profits?
The three-year median payout ratio for Digital China Holdings is 35%, which is moderately low. The company keeps the remaining 65%. So it looks like Digital China Holdings is reinvesting effectively so as to record impressive earnings growth (discussed above) and pay out a well-hedged dividend.
In addition, Digital China Holdings is committed to continuing to share its profits with its shareholders, which we can deduce from its long history of paying dividends for at least ten years.
Overall, we think Digital China Holdings certainly has some positive factors to consider. Despite its low rate of return, the fact that the company reinvested a very large portion of its profits back into its business has undoubtedly contributed to the strong profit growth. That said, the latest forecast from industry analysts shows that the company’s earnings growth is expected to slow. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.