Advertisement
Canada markets closed

  • S&P/TSX

    21,807.37
    +98.93 (+0.46%)
     

  • S&P 500

    4,967.23
    -43.89 (-0.88%)
     

  • DOW

    37,986.40
    +211.02 (+0.56%)
     

  • CAD/USD

    0.7275
    +0.0012 (+0.16%)
     

  • CRUDE OIL

    83.24
    +0.51 (+0.62%)
     

  • Bitcoin CAD

    87,412.31
    +1,546.59 (+1.80%)
     

  • CMC Crypto 200

    1,367.20
    +54.58 (+4.16%)
     

  • GOLD FUTURES

    2,406.70
    +8.70 (+0.36%)
     

  • RUSSELL 2000

    1,947.66
    +4.70 (+0.24%)
     

  • 10-Yr Bond

    4.6150
    -0.0320 (-0.69%)
     

  • NASDAQ

    15,282.01
    -319.49 (-2.05%)
     

  • VOLATILITY

    18.71
    +0.71 (+3.94%)
     

  • FTSE

    7,895.85
    +18.80 (+0.24%)
     

  • NIKKEI 225

    37,068.35
    -1,011.35 (-2.66%)
     

  • CAD/EUR

    0.6824
    +0.0003 (+0.04%)
     

NetEase, Inc.'s (NASDAQ:NTES) Stock Is Going Strong: Is the Market Following Fundamentals?

Simply Wall St
Updated ·4 min read

NetEase (NASDAQ:NTES) has had a great run on the share market with its stock up by a significant 7.4% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on NetEase's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for NetEase

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

ADVERTISEMENT

So, based on the above formula, the ROE for NetEase is:

18% = CN¥19b ÷ CN¥109b (Based on the trailing twelve months to December 2022).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.18 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of NetEase's Earnings Growth And 18% ROE

At first glance, NetEase seems to have a decent ROE. Especially when compared to the industry average of 12% the company's ROE looks pretty impressive. This certainly adds some context to NetEase's decent 17% net income growth seen over the past five years.

We then performed a comparison between NetEase's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 19% in the same period.

past-earnings-growth
past-earnings-growth

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. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for NTES? You can find out in our latest intrinsic value infographic research report.

Is NetEase Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 32% (implying that the company retains 68% of its profits), it seems that NetEase is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, NetEase has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 25% of its profits over the next three years. Accordingly, forecasts suggest that NetEase's future ROE will be 18% which is again, similar to the current ROE.

Summary

In total, we are pretty happy with NetEase's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here