In recent months, Central New Energy Holding Group’s (HKG:1735) stock has experienced a notable increase of 31%. Given the traditional correlation between stock prices and a company’s financial performance over the long term, investors are keen to understand if Central New Energy Holding Group’s financial metrics have influenced this upward trend. Specifically, we delve into the company’s Return on Equity (ROE) to gain insights into its profitability and efficiency.
ROE is a crucial metric for shareholders as it indicates how effectively their capital is being reinvested. Simply put, it measures a company’s profitability relative to its shareholders’ equity.
Calculating ROE involves dividing a company’s net profit from continuing operations by its shareholders’ equity:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
For Central New Energy Holding Group, the calculated ROE based on the trailing twelve months to December 2023 is 5.4%. This figure implies that for every HK$1 worth of equity, the company generated HK$0.05 in profit.
The relationship between ROE and earnings growth is essential. Companies with higher ROE and profit retention tend to exhibit higher growth rates compared to their counterparts.
Although Central New Energy Holding Group’s ROE of 5.4% may seem modest, it aligns closely with the industry average of 6.7%. Despite this, the company has demonstrated exceptional net income growth of 35% over the past five years, outperforming the industry’s average growth rate of 1.1% during the same period. This suggests that factors beyond ROE may be contributing to the company’s growth, such as strategic decision-making by management or a low payout ratio.
Furthermore, Central New Energy Holding Group’s reinvestment of all profits into the business, evident from its lack of dividend payments, has fueled its impressive earnings growth.
In summary, while Central New Energy Holding Group’s ROE may not be remarkable, its high reinvestment of profits has driven substantial earnings growth. Investors should consider the company’s risk profile alongside these positive factors when making investment decisions.