Most readers would already be aware that Sinotruk (Hong Kong)'s (HKG:3808) stock increased significantly by 27% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Sinotruk (Hong Kong)'s ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Do You Calculate Return On Equity?

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 Sinotruk (Hong Kong) is:

14% = CN¥6.7b ÷ CN¥49b (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.14 in profit.

Check out our latest analysis for Sinotruk (Hong Kong)

What Has ROE Got To Do With 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.

Sinotruk (Hong Kong)'s Earnings Growth And 14% ROE

To begin with, Sinotruk (Hong Kong) seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.4%. However, we are curious as to how the high returns still resulted in flat growth for Sinotruk (Hong Kong) in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. These include low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Sinotruk (Hong Kong)'s reported growth was lower than the industry growth of 10.0% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Sinotruk (Hong Kong) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sinotruk (Hong Kong) Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 50% (meaning, the company retains only 50% of profits) for Sinotruk (Hong Kong) suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Sinotruk (Hong Kong) has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 55%. Accordingly, forecasts suggest that Sinotruk (Hong Kong)'s future ROE will be 16% which is again, similar to the current ROE.

Summary

Overall, we feel that Sinotruk (Hong Kong) certainly does have some positive factors to consider. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.