It is hard to get excited after looking at SG Group Holdings' (HKG:1657) recent performance, when its stock has declined 16% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on SG Group Holdings' ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for SG Group 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 SG Group Holdings is:

26% = HK$32m ÷ HK$122m (Based on the trailing twelve months to January 2020).

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$0.26.

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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of SG Group Holdings' Earnings Growth And 26% ROE

First thing first, we like that SG Group Holdings has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 8.8% also doesn't go unnoticed by us. So, the substantial 20% net income growth seen by SG Group Holdings over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that SG Group Holdings' growth is quite high when compared to the industry average growth of 3.8% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. 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 SG Group Holdings is trading on a high P/E or a low P/E, relative to its industry.