New Oriental Education & Technology Group’s (NYSE:EDU) stock is up by a considerable 12% over the past three months. But the company’s key financial indicators appear to be differing across the board and that makes us question whether or not the company’s current share price momentum can be maintained. In this article, we decided to focus on New Oriental Education & Technology Group’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
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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 New Oriental Education & Technology Group is:
9.9% = US$393m ÷ US$4.0b (Based on the trailing twelve months to February 2025).
The ‘return’ is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.10 in profit.
Check out our latest analysis for New Oriental Education & Technology Group
So far, we’ve learned that ROE is a measure of a company’s profitability. 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.
When you first look at it, New Oriental Education & Technology Group’s ROE doesn’t look that attractive. We then compared the company’s ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 15%. Thus, the low net income growth of 4.9% seen by New Oriental Education & Technology Group over the past five years could probably be the result of the low ROE.
As a next step, we compared New Oriental Education & Technology Group’s net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 26% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about New Oriental Education & Technology Group’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
In total, we’re a bit ambivalent about New Oriental Education & Technology Group’s performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
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