Most readers would already know that EEKA Fashion Holdings' (HKG:3709) stock increased by 6.5% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Particularly, we will be paying attention to EEKA Fashion Holdings' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for EEKA Fashion Holdings

How To 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 EEKA Fashion Holdings is:

12% = CN¥394m ÷ CN¥3.2b (Based on the trailing twelve months to December 2019).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.12.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

EEKA Fashion Holdings' Earnings Growth And 12% ROE

To begin with, EEKA Fashion Holdings seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.9%. Probably as a result of this, EEKA Fashion Holdings was able to see a decent growth of 15% over the last five years.

Next, on comparing with the industry net income growth, we found that EEKA Fashion Holdings' growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 EEKA Fashion Holdings is trading on a high P/E or a low P/E, relative to its industry.