It’s hard to get excited after looking at the recent performance of China Kepei Education Group (HKG:1890), as its stock has fallen 23% in the past three months. However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. In this article, we decided to focus on the ROE of China Kepei Education Group.
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.
Check out our latest analysis for China Kepei Education Group
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for China Kepei Education Group is:
13% = CN¥408 million ÷ CN¥3.2 billion (based on the last twelve months to August 2021).
The “yield” is the profit of the last twelve months. This means that for every HK$1 of equity, the company generated HK$0.13 of profit.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
A side-by-side comparison of China Kepei Education Group’s 13% earnings and ROE growth
For starters, China Kepei Education Group’s ROE seems acceptable. Additionally, the company’s ROE compares quite favorably to the industry average of 9.8%. This certainly adds some context to China Kepei Education Group’s outstanding 20% net income growth seen over the past five years. We believe there could be other factors at play here as well. Such as – high revenue retention or effective management in place.
Then, comparing with the industry net income growth, we found that the growth of China Kepei Education Group is quite high compared to the industry average growth of 15% over the same period, this which is great to see.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. What is 1890 worth today? The intrinsic value infographic in our free research report helps visualize whether 1890 is currently being mispriced by the market.
Does China Kepei Education Group use its profits effectively?
China Kepei Education Group’s three-year median payout ratio is a rather moderate 36%, meaning the company retains 64% of its revenue. On the face of it, the dividend is well covered and China Kepei Education Group is effectively reinvesting its earnings, as evidenced by its exceptional growth discussed above.
In addition, China Kepei Education Group paid dividends over a three-year period. This shows that the company is committed to sharing profits with its shareholders. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out about 33% of its earnings over the next three years. Still, forecasts suggest that China Kepei Education Group’s future ROE will hit 19%, even though the company’s payout ratio isn’t expected to change much.
Overall, we believe the performance of China Kepei Education Group has been quite good. In particular, it is good to see that the company is investing heavily in its business, and together with a high rate of return, this has led to significant growth in its profits. We also studied the latest analyst forecasts and found that the company’s earnings growth is expected to be similar to its current growth rate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.