With its stock down 3.5% over the past week, it is easy to disregard Onewo (HKG:2602). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Onewo's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Onewo
How Is ROE Calculated?
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 Onewo is:
9.9% = CN¥1.8b ÷ CN¥18b (Based on the trailing twelve months to June 2024).
The 'return' is the yearly profit. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.10 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 Onewo's Earnings Growth And 9.9% ROE
When you first look at it, Onewo's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 4.9%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 8.8% seen over the past five years by Onewo. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. Such as- high earnings retention or the company belonging to a high growth industry.
When you consider the fact that the industry earnings have shrunk at a rate of 1.4% in the same 5-year period, the company's net income growth is pretty remarkable.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Onewo is trading on a high P/E or a low P/E, relative to its industry.
Is Onewo Efficiently Re-investing Its Profits?
While Onewo has a three-year median payout ratio of 61% (which means it retains 39% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.
While Onewo has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 61%. Still, forecasts suggest that Onewo's future ROE will rise to 12% even though the the company's payout ratio is not expected to change by much.
Conclusion
Overall, we feel that Onewo certainly does have some positive factors to consider. Especially the substantial growth in earnings backed by a decent ROE. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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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.