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KE Holdings (NYSE:BEKE) has had a great run on the share market with its stock up by a significant 13% over the last week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to KE Holdings' ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for KE Holdings
How Do You Calculate Return On Equity?
Return on equity 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 KE Holdings is:
2.7% = CN¥2.0b ÷ CN¥72b (Based on the trailing twelve months to March 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.03.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
KE Holdings' Earnings Growth And 2.7% ROE
It is hard to argue that KE Holdings' ROE is much good in and of itself. Even when compared to the industry average of 9.6%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that KE Holdings grew its net income at a significant rate of 25% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
We then performed a comparison between KE Holdings' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 26% in the same period.
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. Is KE Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.